TY  - JOUR
AU  - Gorton,Gary
AU  - He,Ping
TI  - Agency-Based Asset Pricing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12084
PY  - 2006
Y2  - March 2006
UR  - http://www.nber.org/papers/w12084
L1  - http://www.nber.org/papers/w12084.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Ping He
Department of Finance, Tsinghua SEM
Weilun 308
Beijing 100084, China
Tel: 8610-62795754
Fax: 8610-62784554
E-Mail: heping@sem.tsinghua.edu.cn
AB  - 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.
ER  -