Own-company stockholding and work effort preferences of an unconstrained executive

  • We develop a framework for analyzing an executive’s own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive’s utility-maximizing personal investment and work effort strategy is derived in closed-form, and an indifference utility rationale is demonstrated to determine his required compensation. Our results have implications for the practical and theoretical assessment of executive quality and the benefits of performance contracting. Assuming knowledge of the company’s non-systematic risk, our executive’s unconstrained own-company investment identifies his work effectiveness (i.e. quality), and also reflects work effort that establishes a base-level that performance contracting should seek to exceed.

Export metadata

  • Export Bibtex
  • Export RIS

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:S. Desmettre, J. Gould, A. Szimayer
URN (permanent link):urn:nbn:de:hbz:386-kluedo-15776
Serie (Series number):Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (146)
Document Type:Report
Language of publication:English
Year of Completion:2008
Year of Publication:2008
Publishing Institute:Fraunhofer-Institut für Techno- und Wirtschaftsmathematik
Tag:executive compensation; optimal portfolio choice
GND-Keyword:executive compensation; optimal portfolio choice
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:510 Mathematik

$Rev: 12793 $