Working Paper: CEPR ID: DP13888
Authors: Bart Lambrecht; Shiqi Chen
Abstract: We consider a group of investors with heterogeneous risk preferences that determines a firm's investment policy, and each investor's compensation function. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (busts), reconciling the diversification of opinions hypothesis and the group shift hypothesis. The most (least) risk averse investor has a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We derive investors' utility weights absent wealth distribution and under social optimization.
Keywords: group decisions; investment; payout; risk preference; governance
JEL Codes: G32; G34; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal investment policy (G11) | weighted average of individual optimal policies (C61) |
| risk preferences of each investor (G11) | firm's overall investment strategy (L21) |
| optimal policy (C61) | least risk-averse investor during economic booms (G40) |
| optimal policy (C61) | most risk-averse investor during downturns (G41) |
| payout structure (G35) | non-linear in firm's net worth (D21) |
| risk aversion of investors (G11) | claims on firm's assets (G32) |
| less risk-averse investors (G40) | influence increases during good times (E32) |
| more risk-averse investors (G40) | control during downturns (E32) |