Moral hazard with excess returns

Abstract We consider a public firm characterized by moral hazard problem. A distinguished player is CEO or activist shareholder who (i) unrestricted to trade shares and (ii) has discretion increase the value of this exerting costly effort. von Lilienfeld-Toal Rünzi (J Finance 69(3):1013–1050, 2014) investigate confirm empirical relevance both these properties. This article shows that cannot be “priced in” correctly. In particular, such traded at discount below its equilibrium in market equilibrium. Buyers can systematically earn excess returns on their investment. prediction indeed consistent with substantial positive abnormal for firms within S &P500 &P1500 sample reported 2014).