A Study Of Moral Hazard Problem In Equity

Agency problems exist between managers and shareholders.Because of asymmetry information and partial contract, managers and shareholders do not always share the same goal, which inevitably cause the problem of moral hazard. As the success of China's market economy reforms and the establishment of a healthy capital market, equity has become an important means of financing for listed companies. However, in the operation of the real economy, China's listed companies are also facing some serious problems, for instance,the salary of Executive does not depend on performance of the corhpany,equity become the means for misappropriating,internal shareholders and managers make money for themselves at the expense of small personal investors. The low return and high volatility of the fund beat the confidence of the market heavily, which will finally set bad influence on the healthy of the market.The selection of this topic is aim at finding some ways to reduce the moral hazard problems in equity of listed companies in our economy.There are four part of this text:The first part is a synthesis of this paper,which describes the background, trends, methods and significance of research.Domestic and foreign scholars mainly use the information asymmetry method and principal-agent method to reasrch this problem. This paper is based on the application of game theory and information economics.The second part describes the problem of moral hazard in share contracts in general sense.First of all, the term of moral hazard had its genesis in the insurance market. The insurance companies find it is difficult to observe and monitor the behaviour of people insured, resulting in a "hidden action". insurance companies faced with more risk because people who buy a insurance contract often behave more reckless,loose. Since then, the concept of moral hazard has been widely used in principal-agent problem, it refers to the occasions when agents have a strong motivation from their own interests because of asymmetric information,which would undermine the client's interest.Second, the financial moral hazard refers to the moral hazard problem in the financial market.after the contract is set, one party of the contract lacks an adequate understanding of the other party,which deterred them from making the right choice.For example,after the loan is obtained,Borrower is tend to engage in high risk activities,which is not conducive to the timely repayment. The financial risk of moral hazard can be divided into two categories:moral hazard in direct financing and moral hazard in indirect financing.Finally, the the moral hazard problem in equity contract means that,if the manager has only a small share of companies benefits or if his income is not directly related to the companies' benefits,there will be conflict of interest between managers and share holders, managers who control the enterprise will be act from their own interests, rather than that of shareholders.The third part of the text study the moral hazard problem in the direct financing market.There are many occasions managers can harm the interests of shareholders (1) manipulation and appropriation of profits.(2) inefficient use of capital(3) preference to retain earnings (4) behave short-sightedThe forth part put forward some recommendations on how to reduce the problem of moral hazard in equity,I think that the response to reduce moral hazard problem can be divided into two categories. (1) supervision,in order to supervise the manager effectively,On the one hand supervisor mast improve the level of regulation and the efficiency of supervision,On the other hand,supervisor can increase the manager's cost of moral hazard.On the free-rider problem solving, a way to improve is strengthening government oversight,another effective arrangement is to introduce venture capital. (2)incentive,incentive compatibility is the best arrangement;a manager's performance should be related with others' in the same industry, long-term contracts can reduce the moral hazard problem; competitive markets of managers can reduce the moral hazard problem; when evaluate the manager's performance,we can not over-emphasis on growth rate.