Implications of Executive Hedge Markets for Firm Value Maximization

摘要

This paper analyzes the incentive implications of executive hedge markets. The manager can promise the return from his shares to third parties in exchange for a fixed payment-swap contracts-and/or he can trade a customized security correlated with his firm-specific risk. The customized security improves incentives by diversifying the manager's firm-specific risk. However, unless they are exclusive, swap contracts lead to a complete unraveling of incentives. When security customization is sufficiently high, the manager only trades the customized security-but not any nonexclusive swap contracts, and incentives improve. Access to highly customized hedge securities and/or exclusive swap contracts increases the manager's pay-performance sensitivity.