This article develops an integrated model of asset pricing and moral hazard. It is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk, but the equilibrium price of the stock depends on them. Thus, the expected rate of return is affected by managerial incentives and idiosyncratic risk. It is shown, however, that managerial incentives and idiosyncratic risk affect the expected rate of return through their influence on systematic risk rather than serve as independent risk factors. It is also shown that the risk aversion of the principal in the model leads to less emphasis on relative performance evaluation than in a model with a risk-neutral principal.

This article develops an integrated model of asset pricing and moral hazard. It is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk, but the equilibrium price of the stock depends on them. Thus, the expected rate of return is affected by managerial incentives and idiosyncratic risk. It is shown, however, that managerial incentives and idiosyncratic risk affect the expected rate of return through their influence on systematic risk rather than serve as independent risk factors. It is also shown that the risk aversion of the principal in the model leads to less emphasis on relative performance evaluation than in a model with a risk-neutral principal.

This article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous-time principal-agent framework. Optimal contracts are obtained in closed form. These contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee, a fraction of the total assets under management, plus a bonus or a penalty depending upon the portfolio's excess return relative to a benchmark portfolio. The appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time, rather than a passive index in which the number of shares invested in each asset remains constant over time.

This article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous-time principal-agent framework. Optimal contracts are obtained in closed form. These contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee, a fraction of the total assets under management, plus a bonus or a penalty depending upon the portfolio's excess return relative to a benchmark portfolio. The appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time, rather than a passive index in which the number of shares invested in each asset remains constant over time.

We develop a strategic trading model in which an insider exploits noise traders' overreaction. A feedback effect arises from the insider's trading on fundamental information (the expected growth rate of dividends) and nonfundamental information (insider's inventory or noise supply). We find that the stock price is not fully revealing; a faster mean-reverting noise supply leads to a more volatile price; the price impact can increase with insider's risk-aversion; and a risk-averse insider can trade more aggressively on fundamental information than a risk-neutral one does. Insider's current trade and his previous inventory exhibit simultaneously positive forecasting powers for future stock returns.

[We analyze the effects of differences of opinion on the dynamics of trading volume in stocks and options. We find that disagreements about the mean of the current- and next-period public information lead to trading in stocks in the current period but have no effect on options trading. Without options, we find that disagreements about the precision of all past and current public information affect trading in stocks in the current period. With options, only disagreements about the precisions of the next- and current-period information affect stocks and options trading in the current period. Our results suggest that options trading is concentrated around information events that are likely to cause disagreements among investors, whereas trading in stocks may be diffusive over many periods.]

This article endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. We find that, when the informed portfolio manager is relatively risk tolerant (averse), price informativeness increases (decreases) with the amount of noise trading. When noise trading is endogenized, the linear equilibrium in the traditional literature breaks down under a wide range of parameter values. In contrast, a linear equilibrium always exists in our model. In a conventional portfolio delegation model under a competitive partial equilibrium, the manager's effort of acquiring information is independent of a linear incentive contract. In our strategic trading model, however, a higher-powered linear contract induces the manager to exert more effort for information acquisition. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

[This article endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. We find that, when the informed portfolio manager is relatively risk tolerant (averse), price informativeness increases (decreases) with the amount of noise trading. When noise trading is endogenized, the linear equilibrium in the traditional literature breaks down under a wide range of parameter values. In contrast, a linear equilibrium always exists in our model. In a conventional portfolio delegation model under a competitive partial equilibrium, the manager's effort of acquiring information is independent of a linear incentive contract. In our strategic trading model, however, a higher-powered linear contract induces the manager to exert more effort for information acquisition.]

We develop a strategic trading model in which an insider exploits noise traders' overreaction. A feedback effect arises from the insider's trading on fundamental information (the expected growth rate of dividends) and nonfundamental information (insider's inventory or noise supply). We find that the stock price is not fully revealing; a faster mean-reverting noise supply leads to a more volatile price; the price impact can increase with insider's risk-aversion; and a risk-averse insider can trade more aggressively on fundamental information than a risk-neutral one does. Insider's current trade and his previous inventory exhibit simultaneously positive forecasting powers for future stock returns.

We analyze the effects of differences of opinion on the dynamics of trading volume in stocks and options. We find that disagreements about the mean of the current- and next-period public information lead to trading in stocks in the current period but have no effect on options trading. Without options, we find that disagreements about the precision of all past and current public information affect trading in stocks in the current period. With options, only disagreements about the precisions of the next- and current-period information affect stocks and options trading in the current period. Our results suggest that options trading is concentrated around information events that are likely to cause disagreements among investors, whereas trading in stocks may be diffusive over many periods.