Optimal investment for executive stockholders with exponential utility

  • The scope of this paper is to enhance the model for the own-company stockholder (given in Desmettre, Gould and Szimayer (2010)), who can voluntarily performance-link his personal wealth to his management success by acquiring stocks in the own-company whose value he can directly influence via spending work effort. The executive is thereby characterized by a parameter of risk aversion and the two work effectiveness parameters inverse work productivity and disutility stress. We extend the model to a constant absolute risk aversion framework using an exponential utility/disutility set-up. A closed-form solution is given for the optimal work effort an executive will apply and we derive the optimal investment strategies of the executive. Furthermore, we determine an up-front fair cash compensation applying an indifference utility rationale. Our study shows to a large extent that the results previously obtained are robust under the choice of the utility/disutility set-up.

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Metadaten
Author:S. Desmettre
URN (permanent link):urn:nbn:de:hbz:386-kluedo-16765
Serie (Series number):Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (196)
Document Type:Report
Language of publication:English
Year of Completion:2010
Year of Publication:2010
Publishing Institute:Fraunhofer-Institut für Techno- und Wirtschaftsmathematik
GND-Keyword:executive stockholder ; exponential utility; portfolio choice ; work effort
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:510 Mathematik

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