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.
Author: | S. Desmettre |
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URN: | urn:nbn:de:hbz:386-kluedo-16765 |
Series (Serial 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 first Publication: | 2010 |
Publishing Institution: | Fraunhofer-Institut für Techno- und Wirtschaftsmathematik |
Date of the Publication (Server): | 2011/01/24 |
GND Keyword: | portfolio choice; executive stockholder; work effort; exponential utility |
Faculties / Organisational entities: | Fraunhofer (ITWM) |
DDC-Cassification: | 5 Naturwissenschaften und Mathematik / 510 Mathematik |
Licence (German): | Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011 |