Do Shareholders Really Prefer Their Executives to Maximize the Equity Value? A Newsvendor Case*
Bibliographic record
Abstract
ABSTRACT In this article, we study how the operational decisions of a firm manager depend on her own incentives, the capital structure, and financial decisions in the context of the newsvendor framework. We establish a relationship between the firm’s cost of raising funds and the riskiness of the inventory decisions of the manager. We consider four types of managers, namely, profit, equity, firm value, and profit‐equity maximizers, and initially assume that they may raise funds to increase the inventory level only by issuing debt. We show that the shareholders are indifferent between the different types of managers when the coefficient of variation (CV) of demand is low. However, this is not the case when the CV of demand is high. Based on the demand and the firm’s specific characteristics such as profitability, leverage, and bankruptcy costs, the shareholders might be better off with the manager whose compensation package is tied to the firm value as opposed to the equity value. We, then, extend our model by allowing the manager to raise the required funds by issuing both debt and equity. For this case we focus on the equity and firm value maximizer managers and show that our earlier results (for the debt only case) still hold subject to the cost of issuing equity. However the benefit of the firm value maximizer manager over the equity maximizer manager for shareholders is considerably less in this case compared to the case where the manager can only issue debt. The Board of Directors can take these factors into consideration when establishing/modifying the right incentive package for the managers. We also incorporate the notion of the asymmetric information to capture its impact on the board of directors’ decision about the managers’ incentive package.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.005 | 0.011 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.001 | 0.000 |
| Bibliometrics | 0.001 | 0.000 |
| Science and technology studies | 0.001 | 0.003 |
| Scholarly communication | 0.004 | 0.004 |
| Open science | 0.001 | 0.001 |
| Research integrity | 0.003 | 0.002 |
| Insufficient payload (model declined to judge) | 0.006 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".