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Options, option repricing in managerial compensation: Their effects on corporate investment risk

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  • Ju, Nengjiu
  • Leland, Hayne
  • Senbet, Lemma W.

Abstract

While stock options are commonly used in managerial compensation to provide desirable incentives, they can create adverse incentives to distort the choice of investment risk. Relative to the risk level that maximizes firm value, call options in a compensation contract can induce too much or too little corporate risk-taking, depending on managerial risk aversion and the underlying investment technology. We show that inclusion of lookback call options in compensation packages has desirable countervailing effects on managerial choice of corporate risk policies and can induce risk policies that increase shareholder wealth. We argue that lookback call options are analogous to the observed practice of option repricing.

Suggested Citation

  • Ju, Nengjiu & Leland, Hayne & Senbet, Lemma W., 2014. "Options, option repricing in managerial compensation: Their effects on corporate investment risk," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 628-643.
    • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:628-643
    DOI: 10.1016/j.jcorpfin.2013.11.003
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    6. Diego C. Cueto, 2017. "Private Valuation of Compensation Stock Options," Economia Coyuntural,Revista de temas de perspectivas y coyuntura, Instituto de Investigaciones Economicas y Sociales 'Jose Ortiz Mercado' (IIES-JOM), Facultad de Ciencias Economicas, Administrativas y Financieras, Universidad Autonoma Gabriel Rene Moreno, vol. 2(2), pages 1-30.
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    8. Alberto Razul & Orlando Gomes & Mohamed Azzim Gulamhussen, 2024. "Bonuses, options, and bank strategies," SN Business & Economics, Springer, vol. 4(1), pages 1-28, January.

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    More about this item

    Keywords

    Managerial stock options; Option repricing; Lookback options; Corporate investment risk;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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