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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.

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Author:S. Desmettre, J. Gould, A. Szimayer
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
Date of the Publication (Server):2008/11/03
Tag:executive compensation; optimal portfolio choice
GND-Keyword:optimal portfolio choice; executive compensation
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:5 Naturwissenschaften und Mathematik / 510 Mathematik
Licence (German):Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011