| Popis: |
This paper incorporates the agency problem with a risk-sharing argument for corporate shareholding. With a unilateral investment model, we findconditions for a positive stock investment : (1)the manager is risk averse; (2)her managerial reward is linked with the value of the firm she manages; and (3)the operating profits of investing and invested companies is negatively correlated. Corporate investment is larger if the invested company's operating profit is less vo1atile and/or if the covariance in the operatingprofits of the companies is more strongly negative. If a manager is riskneutral, the manager becomes the residual claimant and pays a high "franchise fee" (i.e. negative wage)to the shareho1der. For managers with a medium degree of risk aversion, shareholders lower the rate of managerial reward which is linked to the firm's performance, and may have to pay a positive fixed wage to keep the managers in the company. If managers are highly risk averse, shareholders lower the link to the performance further. The risk premium remains high because the managers are highly risk averse, but is not so high because the managerial reward is linked weakly to the performance of the company. Hence the wage does not have to be so high to keep the managers in the company. With such factors serving to lower incentive, the profit of the company with highly risk averse managers is low. With a bilateral investment decision model, we find----in addition tO the above results―--- that Corporate investment tends to be larger if the investing company's operating profit is less volatile and/or if there is less counter investment from the invested firm to the investing firm. We also find that shareholders' payoffs are lower than in the unilateral investment model, because the mutuality of investment reducesthe risk reduction effect of stock investment in the bilateral investment model. |
