Performance Evaluation, Managerial Hedging, and Contract Termination

• 成果类型: Article
• 署名作者: Huang, Yu; Ju, Nengjiu; Xing, Hao
• 署名单位: Shanghai Jiao Tong University; Boston University
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2022.4533
• 发表日期: 2023
• 页码: 4953-4971
• 关键词: Moral hazard; managerial hedging; optimal contracting; Performance evaluation

摘要

We develop a dynamicmodel where a principal contractswith an agent to operate a firm. The agent, protected by limited liability, trades privately a market portfolio to hedgemarket risk in his compensation. When liquidation cost of the firm is proportional to its size, the principal manages the termination risk by loading the contract with a positive market component, which alleviates termination risk in normal market conditions but makes termination more likely after negative market shocks. The optimal contract displays a dynamic mixture of absolute and relative performance evaluations and is implemented using a dynamic deferred compensation account.