Stock market tournaments

Ozdenoren, Emre and Yuan, Kathy (2012) Stock market tournaments. Financial Markets Group Discussion Papers (706). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2012 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
Date Deposited:	29 Jun 2023 07:42
Last Modified:	16 Sep 2023 00:01
URI:	http://eprints.lse.ac.uk/id/eprint/119047

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