NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Agency-Based Asset Pricing

Gary Gorton, Ping He

NBER Working Paper No. 12084
Issued in March 2006
NBER Program(s):   AP   CF

We analyze the interaction between managerial decisions and firm value/asset prices by embedding the standard agency model of the firm into an otherwise standard asset pricing model. When the manager-agent's compensation depends on the firm's stock price performance, stock prices are set to induce the creation of future cash flows, instead of representing the discounted value of exogenous cash flows, as in the standard model. In our case, stock prices are formed via trading in the market to induce the managers to hold the number of shares consistent with the optimal effort level desired by the outside investors. We compare two price formation mechanisms, corresponding to two firm ownership structures. In the first, stock prices are formed competitively among a continuum of dispersed investors. In the second, stock prices are set by a single block shareholder, as a bargaining solution. Under both mechanisms there are persistent, dynamic, patterns of asst prices, The level of the equity premium and the return volatility depend on the risk aversion of the agents in the economy and the ownership structure of firms.

download in pdf format
   (564 K)

email paper

This paper is available as PDF (564 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12084

Users who downloaded this paper also downloaded these:
Dow and Gorton w12256 Noise Traders
Gorton, He, and Huang w12075 Asset Prices When Agents are Marked-to-Market
Christiano, Eichenbaum, and Evans w5804 Sticky Price and Limited Participation Models of Money: A Comparison
Gorton and Huang w9158 Liquidity, Efficiency and Bank Bailouts
Gorton and Metrick w15223 Securitized Banking and the Run on Repo
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us