Research On The Mechanism Of The Impact Of Institutional Explicit And Implicit Incentives On The Price Of Assets

The asset management industry is developing rapidly.As of the end of 2022,approximately 100 trillion dollar in assets worldwide have been managed by various fund companies.Institutional investors have gradually become the main investors in the market due to their professional investment technology and information advantages.Institutional investors make investment decisions based on salary incentives,which further affect asset prices,price information content,and market information efficiency.Therefore,studying the impact of institutional incentives on institutional investment behavior and asset prices is of great significance for maintaining financial market stability,improving financial market efficiency,and reducing financial risks.There are two types of incentives for institutions,one is explicit incentives,which is to establish compensation contracts to agree on the institution’s salary,and the institution’s salary is linked to investment performance.According to the different forms of compensation contracts,compensation contracts can be divided into linear contracts and nonlinear contracts;The second type is implicit incentives,where fund investors decide whether to inject or redeem assets based on the investment performance of the fund manager,which in turn affects the asset management scale of the fund manager and indirectly affects the salary of the fund manager.Therefore,it is called implicit incentive.This article studies the impact of explicit and implicit incentives on asset prices,and explores how incentives affect institutional investment behavior and subsequently asset prices from three perspectives: linear contracts,nonlinear contracts,and implicit incentives.Firstly,study the impact of linear contracts on asset prices.Construct a three phase model.In the first phase,institutions obtain information under a given linear contract.In the second phase,investment decisions are made based on the obtained risk asset return information and observed price information.The investment decisions ultimately affect the price of risk assets;The third installment will receive salary payment and consume according to the contract agreement.This article solves institutional investment decision models under linear contracts without benchmarks and linear relative performance contracts with benchmarks,and solves risky asset prices under market clearing conditions to study the impact mechanism of linear contracts on asset prices.Because traditional linear relative performance contracts cannot incentivize institutional information acquisition,cannot improve market information efficiency,and are not conducive to reducing the volatility of excess returns on risky assets,this article further optimizes relative performance contracts and adjusts the benchmark for performance comparison to make the investment benchmark a non negative function of the benchmark composite return rate,meaning that institutional investors can only reward them when they obtain a positive investment return rate,When institutional investors obtain negative investment returns,they are punished to incentivize them to improve information acquisition accuracy,accurately grasp the upward and downward trends of risky asset prices,and obtain positive investment returns.By studying the impact of relative performance contracts based on the quadratic function of return on institutional information acquisition and risk asset prices,this study explores whether new relative performance contracts can solve the suboptimal problem of traditional relative performance contracts in terms of information acquisition incentives and price information content enhancement,and whether they can effectively increase price information content,improve market information efficiency,and reduce return volatility.Secondly,study the impact of nonlinear contracts on asset prices.Combining the limitations of existing linear and nonlinear contracts in addressing price distortions and institutional passive holdings of benchmark portfolios in the presence of agency friction,this thesis introduces portfolio risk into relative performance contracts,constructs nonlinear contracts with portfolio risk,and solves the optimal nonlinear contract and equilibrium asset price with portfolio risk through the HJB equation.Therefore,we obtain the impact of nonlinear contracts containing portfolio risk on the price of risky assets.Research has found that nonlinear contracts containing portfolio risk can effectively reduce price distortions,mobilize institutional investors’ information advantages,enhance their enthusiasm for investing in risky assets,and solve the problem of fund managers passively holding benchmark portfolios.Finally,study the impact of implicit incentives on asset prices.Quantify implicit incentives into two indicators,the intensity of implicit incentives and the degree of asymmetry of implicit incentives.In a continuous time frame,construct an institutional principal-agent model containing implicit incentives,and use the martingale method to solve the optimal investment strategy of the institution,in order to further study the impact of implicit incentives on the investment strategy of the institutions.Assuming that there is only one representative institutional investor in the market,and assuming that the dividend cash flow of risky assets follows a geometric Brownian motion,using market clearing conditions,the price of risky assets in an equilibrium state is solved.The impact of implicit incentives on risky asset prices is studied,and the mechanism by which implicit incentives affect risky asset prices in a complete market is analyzed.Due to implicit incentives leading to institutions adopting aggressive investment behavior,which damages the interests of investors,and when institutional investors cannot fully grasp the return information of risky assets,and multiple market participants divide the dividend income of risky assets in the market,implicit incentives lead to distorted prices of risky assets and increased price fluctuations.Therefore,at the end of the article,this article takes the minimum wealth constraint as an example to discuss how to add portfolio constraints to salary contracts to suppress the negative impact of implicit incentives and improve the flexibility and targeting of salary contract incentives.The research in this article aims to leverage the information advantages of institutional investors,improve market information efficiency,protect the interests of investors with high risk aversion,reduce price fluctuations,reduce institutional moral hazard,enhance institutional investment enthusiasm,restrain the negative effects of implicit incentives,design the optimal compensation contract,and reveal the mechanism of explicit and implicit incentives affecting institutional investors’ decision-making behavior and asset prices.It provides theoretical basis and decision-making reference for financial market regulators to safeguard the interests of all parties,maintain the vitality of financial markets,and design compensation contracts in the commission.