Stock Market Tournaments

Arbeitspapier

We propose a new theory of suboptimal risk-taking based on contractual externalities. We examine an industry with a continuum of firms. Each firm's manager exerts costly hidden effort. The productivity of effort is subject to systematic shocks. Firms' stock prices reflect their performance relative to the industry average. In this setting, stock-based incentives cause complementarities in managerial effort choices. Externalities arise because shareholders do not internalize the impact of their incentive provision on the average effort. During booms, they over-incentivise managers, triggering a rat-race in effort exertion, resulting in excessive risk relative to the second-best. The opposite occurs during busts.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 1222

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; Financial Crises ; Corporate Finance and Governance: General
• Subject: Stock-Based Incentives ; Excessive Risk-Taking ; Insufficient Risk-Taking ; Contractual Externalities ; Börsenkurs ; Leistungsentgelt ; Risikopräferenz ; Führungskräfte ; Vertragstheorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ozdenoren, Emre ; Yuan, Kathy
• Event: Veröffentlichung
• (who): Koç University-TÜSİAD Economic Research Forum (ERF)
• (where): Istanbul
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/108606
• Last update: 10.03.2025, 11:45 AM CET