Underdiversification of Owner-Managers - Required Returns and Incentive Effects
نویسنده
چکیده
Owner-managers of private companies are often highly underdiversified. We investigate the consequences of underdiversification at the company level. There is a strong positive relationship between underdiversification, measured as the share of personal net worth invested in the company, and profitability, measured as the return on equity. The analysis identifies two causes for this underdiversification effect: higher required returns and higher effort. The underdiversification effect is smaller for richer ownermanagers, which is consistent with decreasing relative risk aversion. JEL classification: G32, G11
منابع مشابه
Underdiversification in Private Companies - Required Returns and Incentive Effects
Owner-managers of private companies are often highly underdiversified. We investigate the consequences of underdiversification at the company level. Information on US companies and their owner-managers is obtained from the Survey of Consumer Finances and the Survey of Small Business Finances. Underdiversification, measured as the share of the owner-manager’s net worth invested in the company, h...
متن کاملManagerial Hedging and Incentive Compensation in Stock Market Economies
Managerial Hedging and Incentive Compensation in Stock Market Economies Incentive compensation exposes managers to the risk of their firms. Managers can hedge their aggregate risk exposure by trading in financial markets, but cannot hedge their firmspecific exposure. This gives them an incentive to pass up firm-specific projects in favor of standard projects that contain greater aggregate risk....
متن کاملAn Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal Setting
Prior research documents performance improvements following the implementation of pay-forperformance (PFP) bonus plans. However, bonus plans typically pay for performance relative to a goal and the manager whose performance is to be evaluated often participates in setting goals. In these settings PFP affects managers’ incentive to influence goal levels in addition to affecting performance effor...
متن کاملHedge fund replication strategies: implications for investors and regulators - FINANCIAL STABILITY REVIEW - April 2007
Over the past decade, academic research has identifi ed a number of replication strategies capable of capturing between 40% to 80% of the average return of many popular hedge fund strategies. Investors are beginning to take notice of these replication strategies, especially because of their rule based, transparent features and the fact that they can be executed at low cost. Armed with this alte...
متن کاملIncentives in Duopoly with Product Differentiation
This paper studies equilibrium incentives in a vertically differentiated duopoly with price competition. We analyze one simultaneous-move game and two sequential-move games. In a simultaneous-move game, firms' managers determine their prices simultaneously in the first stage of the game and in the second stage two firms determine incentive schemes. One sequential-move game considers the case in...
متن کامل