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Optimal Incentive Contracts for Loss-Averse Managers: Stock Options versus Restricted Stock Grants

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  • Anna Dodonova
  • Yuri Khoroshilov

Abstract

This paper provides an explanation for the widespread use of stock option grants in executive compensation. It shows that the optimal incentive contract for loss-averse managers must contain a substantial portion of stock options even when it should consist exclusively of stock grants for "classical" risk-averse managers. The paper also provides an explanation for the drastic increase in the risk-adjusted level of CEO compensations over the past two decades and argues that more option-based compensation should be used in firms with higher cash flow volatility and in industries with a higher degree of heterogeneity among firms. Copyright 2006, The Eastern Finance Association.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 41 (2006)
Issue (Month): 4 (November)
Pages: 451-482

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Handle: RePEc:bla:finrev:v:41:y:2006:i:4:p:451-482

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Web page: http://www.easternfinance.org/
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Cited by:
  1. Yuri Khoroshilov, 2012. "Incentive Contracts for Overoptimistic Managers," Economics Bulletin, AccessEcon, vol. 32(2), pages 1687-1694.

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