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seminario
Istituto Metodi Quantitativi - Università L. Bocconi
Viale Isonzo, 25 - 20135 Milano
Tel. 02-58365629 - Fax 02-58365630
SEMINARIO
Managerial Hedging and Incentive
Compensation in Stock Market Economies
Alberto Bisin
New York University
Giovedì, 12 dicembre - ore 16.30
Aula IMQ stanza n.137
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Abstract. 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 firm specific exposure. This
gives them an incentive to pass up firm-specific projects in favour of
standard projects that contain greater aggregate risk, giving rise to
excessive aggregate risk in stock markets compared to the first-best
allocation. In turn, this reduces the ability of investors to use stock
markets to share risks amongst each other. The optimal incentive
compensation designed to address such diversification externality is
characterized in a capital asset pricing model(CAPM) economy.The extent to
which managers can hedge their risks in financial markets a ects in
important ways the activeness of the optimal design in controlling
diversification externality. Keywords: Incentive Compensation, Hedging,
Aggregate Risk, Idiosyncratic Risk, Financial Innovation, Capital Asset
Pricing Model(CAPM) J.E.L.Classification Code: G31, G32,G10,D52,D62,J33