Paper #787

Title:

Moral hazard and dynamics of insider ownership stakes

Author:

Branko Urosevic

Date:

February 2001 (Revised: October 2004)

Abstract:

In this paper, I analyze the ownership dynamics of N strategic risk-averse corporate insiders facing a moral hazard problem. A solution for the equilibrium share price and the dynamics of the aggregate insider stake is obtained in two cases: when agents can credibly commit to an optimal ownership policy and when they cannot commit (time-consistent case). In the latter case, the aggregate stake gradually adjusts towards the competitive allocation. The speed of adjustment increases with N when outside investors are risk-averse, and does not depend on it when investors are risk-neutral. Predictions of the model are consistent with recent empirical findings.

Keywords:

Corporate insiders, moral hazard, ownership dynamics

JEL codes:

G14, G32, D43

Area of Research:

Finance and Accounting

Download the paper in PDF format