The Journal of Finance

Moral Hazard and the Portfolio Management Problem

Published: 12/1993,  Volume: 48,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1993.tb05140.x  |  Cited by: 138

NEAL M. STOUGHTON

This paper investigates the significance of nonlinear contracts on the incentive for portfolio managers to collect information. In addition, the manager must be motivated to disclose this information truthfully. We analyze three contracting regimes: (1) first‐best where effort is observable, (2) linear with unobservable effort, and (3) the optimal contract within the Bhattacharya‐Pfleiderer quadratic class. We find that the linear contract leads to a serious lack of effort expenditure by the manager. This underinvestment problem can be successfully overcome through the use of quadratic contracts. These contracts are shown to be asymptotically optimal for very risk‐tolerant principals.

Moral Hazard and Adverse Selection: The Question of Financial Structure

Published: 6/1986,  Volume: 41,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1986.tb05051.x  |  Cited by: 66

MASAKO N. DARROUGH, NEAL M. STOUGHTON

This paper looks at the moral hazard and adverse selection problems confronting an entrepreneur offering securities to an uninformed, but competitive financial market. The adverse selection aspect of the problem is generated by the unobservable entrepreneur's ability to transform effort into value. Moral hazard arises because the investment decision is made subsequent to financing. We consider the joint use of both debt and equity, and characterize the equilibrium relation between capital structure and unobservable attributes. It is shown that: (1) investment and financing are not separable; (2) there is an underinvestment problem for “better” firms; and (3) simultaneous use of both debt and equity can resolve this difficulty. We also establish a connection between expected terminal firm value and debt‐promised payment level and between share retention and standard deviation.

Intermediated Investment Management

Published: 5/23/2011,  Volume: 66,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2011.01656.x  |  Cited by: 121

NEAL M. STOUGHTON, YOUCHANG WU, JOSEF ZECHNER

Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance, and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.

Potential Competition And Actual Competition In Equity Options

Published: 7/1987,  Volume: 42,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1987.tb04566.x  |  Cited by: 40

ROBERT NEAL

THE MONEY DEMAND AND SUPPLY DETERMINANTS OF STOCK PRICES*

Published: 9/1972,  Volume: 27,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1972.tb01334.x  |  Cited by: 0

Neal Allen Pepper

International Investment Restrictions and Closed‐End Country Fund Prices

Published: 6/1990,  Volume: 45,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1990.tb03701.x  |  Cited by: 79

CATHERINE BONSER-NEAL, GREGGORY BRAUER, ROBERT NEAL, SIMON WHEATLEY

Some closed‐end country funds trade at large premiums relative to their net asset values. This paper examines whether international investment restrictions raise country fund price‐net asset value ratios by segmenting international capital markets. We test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from May 1981 to January 1989. The results provide evidence that some foreign markets are at least partially segmented from the U.S. capital market.