We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
SHARING RULE CONTRACTS BETWEEN MANAGEMENT AND INVESTORS AND THEIR EFFECT ON THE MANAGEMENT'S ATTITUDE TOWARDS RISK.
- Authors
Bulmash, Samuel B.; Mehrez, Avraham
- Abstract
The model demonstrates that an investor can offer different contracts to a risk neutral manager, thereby inducing him to behave as a risk lover or a risk averser. The investor's expected utility and the manager's expected income are maximized, with the entire process involving a finite number of eliminations and therefore providing a solvable structure. This model has interesting implications for future research on agency costs: an interesting problem arises when the investor assumes wrongly that the manager is risk neutral, whereas the manager is really a risk averser. If the investor offers him contract No. 1 (which induces risk loving behavior), the manager may reject or break the contract. Thus, the investor's ignorance of the true utility function of the manager may result In a premature breaking of the contract by the manager and concomitant costs (new search and selection expenses etc.) to the investor. These costs should be added to the list of agency costs which were mentioned by Jensen and Meckling. The way to reduce these costs is for the manager to reveal to the investor his true attitude towards risk, so that they could reach a sharing rule contract that is mutually agreeable.
- Publication
Journal of Business Finance & Accounting, 1985, Vol 12, Issue 3, p399
- ISSN
0306-686X
- Publication type
Academic Journal
- DOI
10.1111/j.1468-5957.1985.tb00842.x