Shaking the Tree: An Agency-Theoretic Model of Asset Pricing

Shorish, Jamsheed; Spear, Stephen E.

doi:10.1007/3-540-27192-9_10

“…The volatility persists as reported earnings persist. Although 3 The modeling technique presented here bears some similarities with Shorish and Spear [2005]. The similarities and differences between their paper and this paper will be discussed later in this section.…”

Section: Introductionmentioning

confidence: 93%

“…In particular, by switching on and off the measure for earnings management in the model, I maintain the focus on earnings management and make the comparison with the standard asset-pricing model transparent. This modeling approach is related to Shorish and Spear [2005], where the owner of the firm hires a manager to maximize the firm's value, and there is asymmetric information about the manager's effort level between the owner and the manager. Along this line of agency-based asset pricing, Gorton and He [2006] show that when compensation depends on the firm's market performance, stock prices are set to induce the optimal effort level.…”

Section: Introductionmentioning

confidence: 99%

Asset Returns with Earnings Management

Sun

¹

2010

SSRN Journal

1

0

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The paper investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal-agent model with financial reporting and managerial effort is embedded in a Lucas asset-pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of financial anomalies observed in the return data: volatility clustering, asymmetric volatility, and increased idiosyncratic volatility. The calibration results further indicate that earnings management by individual firms does not only deliver the observed features in their own stocks, but can also be strong enough to generate market-wide patterns.

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“…The modeling technique presented here bears some similarities withShorish and Spear [2005]. The similarities and differences between their paper and this paper will be discussed later in this section 4.…”

mentioning

confidence: 94%

“…In particular, by switching on and off the measure for earnings management in the model, I maintain the focus on earnings management and make the comparison with the standard asset-pricing model transparent. This modeling approach is related to Shorish and Spear [2005], where the owner of the firm hires a manager to maximize the firm's value, and there is asymmetric information about the manager's effort level between the owner and the manager. Along this line of agency-based asset pricing, Gorton and He [2006] show that when compensation depends on the firm's market performance, stock prices are set to induce the optimal effort level.…”

Section: Introductionmentioning

confidence: 99%

Asset Returns with Earnings Management

Sun

¹

2009

internationalfinance

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The paper investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal-agent model with financial reporting and managerial effort is embedded in a Lucas asset-pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of financial anomalies observed in the return data: volatility clustering, asymmetric volatility, and increased idiosyncratic volatility. The calibration results further indicate that earnings management by individual firms does not only deliver the observed features in their own stocks, but can also be strong enough to generate market-wide patterns.

show abstract

“…Timmerman (1996) combines rare structural breaks in the dividend process with incomplete learning. Shorish and Spear (1996) show how moral hazard between the owner and manager of a Þrm generates serial correlation in squared price changes in a Lucas asset pricing model. Den Haan and Spear (1997) show how agency costs and borrowing constraints give rise to wealth effects that yield serial correlation in squared interest rate changes.…”

mentioning

confidence: 99%

Private Information and High-Frequency Stochastic Volatility

Kelly

¹

,

Steigerwald²

2004

Studies in Nonlinear Dynamics &Amp; Econometrics

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We study the effect of privately informed traders on measured price changes and trades in asset markets. In the model exogenous news is captured by signals that informed agents receive. Agents trade anonymously through a market specialist, who does not receive a signal. We show that the entry and exit of informed traders following the arrival of news accounts for high-frequency serial correlation in squared price changes (stochastic volatility) and trades. Because the bid-ask spread of the market specialist tends to shrink as individuals trade and reveal their information, the model also accounts for the empirical observation that high-frequency serial correlation is more pronounced in trades than in squared price changes. * We thank

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Shaking the Tree: An Agency-Theoretic Model of Asset Pricing

Cited by 8 publications

References 26 publications

Asset Returns with Earnings Management

Asset Returns with Earnings Management

Asset Returns with Earnings Management

Private Information and High-Frequency Stochastic Volatility

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