Moral Hazard and Excess Returns
Abstract:
Consider a firm's manager who faces a moral hazard problem and can trade shares of the firm in the market. This special type of trader, here called the distinguished player, can influence the value of the firm subject to private effort costs.
This article demonstrates how the different incentives between outside investors and the distinguished player imply that rational (and irrational noise-) traders systematically trade shares of such a firm at a discount below its equilibrium value if the distinguished player can trade anonymously. Buyers of this asset thereby earn excess returns on their investment. The resulting prediction that investment in companies with a distinguished player yields excess returns is consistent with empirical evidence in von Lilienfeld-Toal and Rünzi (2007) who report positive abnormal returns for owner-manager firms taken from S&P500 and S&P1500 firms.
Biography:Matthias Blonski studied Mathematics and Physics. 1995 he received his PhD in economics at the University of Mannheim. Since 2003 he is professor for Microeconomics at the Goethe University Frankfurt.