Incentive Contracts, Market Risk, and Cost of Capital

Bertomeu, Jeremy

doi:10.1111/1911-3846.12130

Cited by 10 publications

(3 citation statements)

References 40 publications

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“…He observes that idiosyncratic cash flow risk affects the stock price but not the dollar returns (risk premium). Bertomeu (2015) studies an agency model within a multifirm setting. He shows that the average cost of capital is independent of agency frictions because the optimal effort in his model is constant.…”

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confidence: 99%

Idiosyncratic Information, Moral Hazard, and the Cost of Capital

Gao

2019

Contemporary Accting Res

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This paper examines the effects of idiosyncratic accounting information on a firm's cost of capital. By embedding a moral hazard problem into a multifirm asset‐pricing model, I show that moral hazard distorts the sharing of idiosyncratic risk but does not affect the sharing of systematic risk in the economy. A firm‐level improvement in idiosyncratic information reduces the firm's cost of capital even though it does not affect the implied cost of capital inferred from publicly traded shares. Moreover, an economy‐level improvement in idiosyncratic information reduces the risk premium for idiosyncratic risk but increases the risk premium for systematic risk, resulting in an ambiguous net effect on the firm's cost of capital. These results provide alternative explanations for the mixed empirical evidence on the relation between information quality and the cost of capital.

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confidence: 99%

Idiosyncratic Information, Moral Hazard, and the Cost of Capital

Gao

2019

Contemporary Accting Res

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“… While many standard specifications of agency problems assume a risk‐averse agent (Christensen, Feltham, and Şabac ; Bertomeu ), we assume a risk‐neutral agent to abstract from risk‐sharing so that we can focus on the incentive problem and illustrate the role of limited managerial wealth, for example, see Hölmstrom and Tirole () or Laux and Stocken (). Risk‐aversion normally has an ambiguous effect on the desirability of a measurement system (Larmande ), which makes its inclusion in the analysis a nontrivial exercise. …”

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confidence: 99%

Optimal Conservatism with Earnings Manipulation

Bertomeu

Darrough

Xue

2016

Contemporary Accting Res

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101

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This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn increases the equilibrium earnings manipulation. Trade-offs between inducing effort and curbing manipulation predict an interior level of conservatism as optimal. The optimal level of conservatism is positively associated with enforcement, economic profitability and earnings quality, and negatively associated with agency frictions. In particular, we show that more economically profitable firms choose to be more conservative. We also establish that the association between performance pay and manipulation identifies whether conservatism is optimally chosen or exogenously imposed. In an application to debt contracting, we show that optimal conservatism is negatively associated with borrowers' bargaining power. Prudence optimale et manipulation des r esultats R ESUM ECette etude examine le rôle de la prudence comptable lorsqu'un g erant peut manipuler le compte de r esultat. Une mesure plus prudente est telle que, pour un certain risque economique, la probability d'un bon r esultat comptable est plus faible et, donc, se traduit par des bonus moins fr equents. Nous d emontrons que le contrat de compensation du g erant doit s'ajuster en augmentant le niveau du bonus, ce qui conduit le g erant a d'avantage manipuler les resultats pour atteindre le bonus plus elev e. Un exc es de prudence, par cons equent, peut donner lieu plus de manipulation. Notre th eorie pr edit un niveau de prudence optimal et, a l' equilibre, les entreprises avec de meilleures perspectives economiques, des mesures comptables de meilleure qualit e ou moins de pouvoir de n egociation avec leurs banques, choisissent un niveau de prudence sup erieur.

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“…This paper selected the stock price within the event window ([−3,10]) to measure the market’s reaction to the Vanke equity disputes. This paper measured Vanke ’s individual stock rate of return R i,t and market rate of return R m,t , and calculates Vanke ’s normal rate of return E ( R i,t ), Abnormal Return AR i,t and Cumulative Abnormal Return CAR i in different event windows ( Bertomeu, 2015 ; Hua et al, 2018 ).…”

Section: Damage To the Interests Of Small And Medium Shareholdersmentioning

confidence: 99%

Analysis of Equity Disputes in Listed Companies With Dispersed Ownership Structure and Protection of Small and Medium Shareholders’ Interests

Soh

Ong

et al. 2022

Front. Psychol.

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This paper selected Vanke as the case to study the governance problems of Vanke and the protection of the interests of small and medium shareholders under the situation of equity disputes. At the same time, the study further explored the advantages and disadvantages of the dispersed ownership structure, the long-term impact on the company’s development and the choice of the involved corporate governance methods under the current Chinese capital market conditions. This paper adopted the event research method and selected the period from June 2015 to June 2017 (24 months) as the observation period to analyze the market performance impact of Vanke in the equity disputes. At the same time, this paper also measured Vanke’s individual stock rate of return (Rit) and market rate of return (Rmt), and calculated Vanke’s normal rate of return [E(Ri,t)], abnormal rate of return (ARi,t), and cumulative abnormal rate of return (CARi) during different event windows ([−3,10]). Vanke’s shareholding was too dispersed and the stock price had been sluggish for a long time, which had greatly reduced the acquisition difficulty and cost of Baoneng, thus triggering the “barbarian invasion” of Baoneng. In the struggle for control, whether it was Vanke’s anti-takeover measures or China Resources, Baoneng, and Evergrande’s competition for equity, their actions had harmed the interests of small and medium shareholders. The market supervision department was too lenient to supervise and punish the interests of small and medium shareholders, and opportunism made behaviors that infringe on the interests of others more reckless. However, small and medium shareholders cannot actively participate in the company’s management decision-making to safeguard their legitimate rights and interests, which intensifies the violations of all parties in the equity disputes, thus forming a vicious circle. Therefore, the protection of the interests of small and medium shareholders required the joint efforts and consciousness of regulators, small and medium shareholders, and acquirers.

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Incentive Contracts, Market Risk, and Cost of Capital

Cited by 10 publications

References 40 publications

Idiosyncratic Information, Moral Hazard, and the Cost of Capital

Idiosyncratic Information, Moral Hazard, and the Cost of Capital

Optimal Conservatism with Earnings Manipulation

Analysis of Equity Disputes in Listed Companies With Dispersed Ownership Structure and Protection of Small and Medium Shareholders’ Interests

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