Managerial hedging, equity ownership, and firm value

Viral V. Acharya, Alberto Bisin

    Research output: Contribution to journalArticlepeer-review


    Suppose risk-averse managers can hedge the aggregate component of their exposure to firm's cash-flow risk by trading in financial markets but cannot hedge their firm-specific exposure. This gives them incentives to pass up firm-specific projects in favor of standard projects that contain greater aggregate risk. Such forms of moral hazard give rise to excessive aggregate risk in stock markets. In this context, optimal managerial contracts induce a relationship between managerial ownership and (i) aggregate risk in the firm's cash flows, as well as (ii) firm value. We show that this can help explain the shape of the empirically documented relationship between ownership and firm performance.

    Original languageEnglish (US)
    Pages (from-to)47-77
    Number of pages31
    JournalRAND Journal of Economics
    Issue number1
    StatePublished - 2009

    ASJC Scopus subject areas

    • Economics and Econometrics


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