Optimal risk-sharing with effort and project choice

Cadenillas, Abel; Cvitanić, Jakša; Zapatero, Fernando

doi:10.1016/j.jet.2005.12.007

Cited by 78 publications

(56 citation statements)

References 30 publications

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“…For details, see the references mentioned in the proof. 6 If we modeled S as a Brownian motion with drift rather than a geometric Brownian motion, the optimal contract would be linear in S, not in log(S), in the case of CARA preferences.…”

Section: Resultsmentioning

confidence: 99%

On managerial risk-taking incentives when compensation may be hedged against

2014

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We consider a continuous time principal-agent model where the principal/firm compensates an agent/manager who controls the output's exposure to risk and its expected return.Both the firm and the manager have exponential utility and can trade in a frictionless market. When the firm observes the manager's choice of effort and volatility, there is an optimal contract that induces the manager to not hedge. In a two factor specification of the model where an index and a bond are traded, the optimal contract is linear in output and the log return of the index. We also consider a manager who receives exogenous share or option compensation and illustrate how risk taking depends on the relative size of the systematic and firm-specific risk premia of the output and index. Whilst in most cases, options induce greater risk taking than shares, we find that there are also situations under which the hedging manager may take less risk than the non-hedging manager.

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Section: Resultsmentioning

confidence: 99%

On managerial risk-taking incentives when compensation may be hedged against

2014

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“…Kaplan and Stromberg (2003) compare financial contracting models' ability to explain contracts used in reality. Several studies in this area, notably Cadenillas, Cvitanic, and Zapatero (2007) and Bolton and Harris (2013), consider, like us, settings without agency problems, but they do not explain the use of convertible securities.…”

Section: Introductionmentioning

confidence: 93%

“…Hence, the financier faces an incomplete market for this risk; for the entrepreneur, on the other hand, the market is complete. Some of the above features make our framework similar to that of Cadenillas, Cvitanic, and Zapatero (2007), as elaborated on in Section 2.3.…”

Section: Modelmentioning

confidence: 99%

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Security Design with Status Concerns

et al. 2015

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This paper provides a status-based explanation for convertible securities. We consider a dynamic setting in which a status-driven entrepreneur with a project idea decides what security to issue to finance the project and how to manage the project over time. We solve the problem analytically and find that the optimal security is considerably similar to a convertible security. Our model can also explain why relatively riskier companies, such as start-ups or small firms, resort to convertible securities more often, as well as why these securities differ in their conversion ratios. The dynamic nature of our model is key to our results whereas asymmetric information and ensuing agency conflicts play no role, which makes our explanation of convertible securities notably different from existing ones.JEL Classifications: G32, C61, G24, D86.

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“…Much of the existing literature has focused on contract design in the resolution of the conflicts of interest between investors and (heterogeneously skilled or informed) portfolio managers (Bhattacharya and Pfleiderer 1985, Stoughton 1993, Heinkel and Stoughton 1994, Ou-Yang 2003, Cadenillas et al 2007, Dybvig et al 2010. Another strand takes as given the conflicts of interest and their imperfect resolution (e.g., through benchmarking), and studies the impact on market behavior (Brennan 1993, Cornell and Roll 2005, Cuoco and Kaniel 2011.…”

Section: Introductionmentioning

confidence: 99%

Competition in Portfolio Management: Theory and Experiment

et al. 2015

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W e explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor-manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow-Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory).

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Optimal risk-sharing with effort and project choice

Cited by 78 publications

References 30 publications

On managerial risk-taking incentives when compensation may be hedged against

On managerial risk-taking incentives when compensation may be hedged against

Security Design with Status Concerns

Competition in Portfolio Management: Theory and Experiment

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