Asset Pricing with a CEO

Author: Patrick Konermann (BI Oslo)

Title: Asset Pricing with a CEO

Abstract: We study an economy with an optimistic and powerful CEO, who all by himself decides about real investment and controls the payout policy. While the CEO over-invests in capital relative to what the shareholder would implement, investment depends directly on their disagreement. For the CEO and the shareholder interact through financial markets, where the CEO levers up to invest in equity. Relative to a social planner economy, over-investment fuels high growth but also high absolute volatility in consumption rates. While welfare declines for the shareholder, it can be higher, but also lower for the CEO.