@techreport{Bisin2004Managerial,
abstract = {Incentive compensation induces correlation between the portfolio of managers and the cash
flow of the firms they manage. This correlation exposes managers to risk and hence gives
them an incentive to hedge against the poor performance of their firms. We study the agency
problem between shareholders and a manager when the manager can hedge his incentive
compensation using financial markets and shareholders cannot perfectly monitor the
manager?s portfolio in order to keep him from hedging the risk in his compensation. In
particular, shareholders can monitor the manager?s portfolio stochastically, and since
monitoring is costly governance is imperfect. If managerial hedging is detected, shareholders
can seize the payoffs of the manager?s trades. We show that at the optimal contract: (i) the
manager?s portfolio is monitored only when the firm performs poorly, (ii) the more costly
monitoring is, the more sensitive is the manager?s compensation to firm performance, and (iii)
conditional on the firm?s performance, the manager?s compensation is lower when his
portfolio is monitored, even if no hedging is revealed by monitoring.},
author = {Alberto Bisin and Piero Gottardi and Adriano A. Rampini},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {G30; D82; 330; executive compensation; incentives; monitoring; corporate governance; F\"{u}hrungskr\"{a}fte; Leistungsorientierte Verg\"{u}tung; Aktienoptionsplan; Hedging; Portfolio-Management; Leistungskontrolle; Agency Theory; Theorie},
language = {eng},
number = {1322},
title = {Managerial hedging and portfolio monitoring},
type = {CESifo working papers},
url = {http://hdl.handle.net/10419/18687},
year = {2004}
}
