11.2

Question 1

OC - investment decisions - distortions

Answer 1

OC leads to higher sensitivity CF.

CF sensitivity will be higher in equity dep firms (most constrained firms)

Question 2

Oc triggered by…

Answer 2

1. Illusion of control
2. Typical CEO is also highly commitment to good outcomes - influence human capital
3. Abstract reference point

Question 3

Traditional expl

Answer 3

Agency cost: high Cf and high D

Asymmetric info: high CF but low Distortion

Question 4

3 measurements used for OC

Answer 4

If they were rational they should diversify as much as possible and get rid of firm stock asap.
1. Holder 67% : ceo should sell immediately after vesting period when stock is 67% in the money (benchmark)

2. Longholder: if ceo keeps till expiration date. Most conservative measure
3. Net buyer: if ceo purchases additional stock even though already high exposure to firk risk

Question 5

Inside information

Answer 5

If ceo has inside info it makes sense why he keeps it longer.

• persistance: its impossible for a ceo to constantly have info
• performance: if it was good info it should pay off (positive alpha). On average ceo dont beat the market

Question 6

Signalling

Answer 6

Signal to market that firms prospects are better than others

• lower info symmetry, value firm increases, sensitivity goes away. Net buyer can measure this since its measured in two disjoint periods

Question 7

Risk tolerance

Answer 7

Ceo is low risk averse. But then he should be willing to lever up (borrow debt = sell stocks) and thus less sensitive to cash

Question 8

Tax reasons

Answer 8

To delay payment of taxes

Doesnt explain add purchases. Doesnt predict higher sensitivity

Question 9

Procrastination

Answer 9

> 8% still conducts other transactions. Should not be in Net buyer: buying add purchases