We analyze a principal-agent model in which the principal (e.g., shareholders) and the agent (e.g., an employee) can personally trade securities tied to the outcome of an uncontrollable event affecting output. The model is employed to address two questions. First, under what conditions does compensation risk management at the individual level substitute for compensation risk management at the firm level? Second, if compensation risk management at the firm level is optimal, how should the compensation risk be managed?
Review of Accounting Studies – Springer Journals
Published: Sep 30, 2004
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