Skip to main content

E&F Talk by Ro'i Zultan (Ben Gurion): Moral hazard and excess returns in markets

The Department of Economics & Finance is pleased to welcome Ro’i Zultan (Ben Gurion University)

Title: Moral hazard and excess returns in markets (with Lawrence Choo & Todd Kaplan)

Abstract: Stocks of firms with high managerial ownership are often underpriced and yield excess returns. Moral hazard provides a possible explanation for this phenomenon. Managerial holdings incentivize the manager-owner to increase the firm’s value by exerting effort. If the stock price reflects this effort, the manager benefits from selling her stocks and withholding effort. In equilibrium, therefore, prices are maintained at a low level at which the manager is indifferent between exerting effort and selling. We provide evidence for this explanation in an experimental market. With moral hazard, stocks are underpriced, with prices converging towards equilibrium. We further test the implications of a disclosure policy. Making managerial transactions public—as required, for example, by United States federal law—has two effects. First, prices converge rapidly to equilibrium. Second, as prices respond to current managerial holdings, managers can extract money by creating a “money pump,” buying at low prices and selling at high prices repeatedly.

Please be Covid aware and considerate of others:

  • Do not come if you have Covid symptoms.

  • Please wear a face covering (unless exempt).

  • Consider taking a lateral flow test on the morning of the presentation.

External guests: Please register by email to