Study On The Equity Incentive Mechanism Of Executive Under Inflation

The principal-agent problem is one of the basic problems in corporate governance.The relative separation of ownership and management laid a foundation for the development of stockholding system,but it also caused agency conflicts between shareholders and executives.The main contradiction is that because of the information asymmetry,the company owners and the executives usually have different objective functions,and there are divergence of interests in the process of pursui:ng their own utility maximization.The equity incentive mechanism can make the company and the executives convergence of interests,and solve the problem of principal-agent between the company owners and executives.The key to the equity incentive mechanism is that the company develops equity incentives for executives based on an observable performance,but according to the principal-agent theory,the observable performance in reality is affected by the risk of uncertainty in the exogenous environment,such as inflation risk,the most intuitive effect of inflation risk is to shrink wealth.Thus it is necessary for companies to consider the risks from the market environment when formulating equity incentives.This paper studies the equity incentive mechanism under the inflation risk.The first part discusses that executive freely allocate personal assets between risk-free asset,market portfolio,and company stock to seek to maximize the expected utility of the real wealth under considering inflation uncertainty.We choose risk aversion and work effort efficiency as the characteristic parameters of executive,and set executive to directly influence the company's stock price through work effort.In the case of inflation uncertainty,executives freely allocate personal assets between risk-free asset,market portfolio and company stock to seek the maximum utility of the terminal real wealth.Firstly,we use the Ito formula to discount the inflation of the nominal asset price process.The dynamic equation of the real wealth process is obtained.Secondly,the Ham ilton-Jacobia-Bellman equation(HJB equation),which is satisfied by the value function of the executive optimal investment decision,is established by using the dynamic programming principle,and the analytic solution of HJB equation is found.Finally,the influence of inflation uncertainty on executive equity incentives and work effort strategies is analyzed by numerical simulation.The second part analyses that the principal-agent problem of continuous time under inflation.The drift of the company's cash flow process,characterized by geometric Brownian motion,relies on the unobservable effort of the agent,and the corresponding time-varying corporate cash flow determines the agent's compensation,including performance-based corporate equity incentives,but due to inflation uncertainty affects the true value of the company's cash flow.Firstly,we use the Ito formula to derive the dynamic equation of the company's real cash flow after inflation discounting.Secondly,we use the martingale representation theorem to obtain the continuous output value equation of the post-inflation executives.Finally,the agent's continuous return value accounts for the time-varying company's cash flow payment ratio as the observed variable,and the HJB equation of the optimal payment proportional value function is obtained.Finally,we summarize the full text,and point out the research inadequacies that can be improved.