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Dynamic Agency and Large‐Risk Taking
Author(s) -
Li Rui
Publication year - 2019
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12172
Subject(s) - moral hazard , incentive , agency (philosophy) , investment (military) , financial crisis , business , value (mathematics) , financial risk , actuarial science , hazard , finance , economics , microeconomics , computer science , macroeconomics , philosophy , chemistry , organic chemistry , epistemology , machine learning , politics , political science , law
I propose a dynamic investment model with moral hazard under which greater exposure to future uncertainties about losses could enhance incentive provisions and improve firm value. The model provides an explanation for why many financial companies and investment banks choose to improve their short‐run performance by putting themselves at greater risk of catastrophic losses in the future, as what happened prior to the 2007 financial crisis.