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Incentives of Stock Option Based Compensation

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Author Info

  • Elettra Agliardi

    ()

  • Rainer Andergassen

    ()

Abstract

We introduce explicitly the effort as a choice variable in a continuous time utility maximisation framework of an executive who is partly compensated with stock options. We solve the model in the case where the executive is not allowed to trade in the company’s stock but is able to achieve a partial insurance through trading in a correlated market portfolio. We define the executive’s value of the options through a certainty equivalence approach both in the case of European call options and non-standard capped stock options and study the behaviour of the reservation price as relevant parameters change. Copyright Springer Science+Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11156-005-3177-8
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Bibliographic Info

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 25 (2005)
Issue (Month): 1 (August)
Pages: 21-32

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Handle: RePEc:kap:rqfnac:v:25:y:2005:i:1:p:21-32

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Web page: http://springerlink.metapress.com/link.asp?id=102990

Related research

Keywords: incentives; executive stock options; unhedgeable risks; utility maximisation; non-standard options compensation;

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References

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  1. Vicky Henderson, 2002. "Stock Based Compensation: Firm-specific risk, Efficiency and Incentives," OFRC Working Papers Series 2002fe01, Oxford Financial Research Centre.
  2. Kevin J. Murphy & Brian J. Hall, 2000. "Optimal Exercise Prices for Executive Stock Options," American Economic Review, American Economic Association, vol. 90(2), pages 209-214, May.
  3. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 835-72.
  4. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
  5. Lisa Meulbroek, 2001. "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Financial Management, Financial Management Association, vol. 30(2), Summer.
  6. Johnson, Shane A. & Tian, Yisong S., 2000. "The value and incentive effects of nontraditional executive stock option plans," Journal of Financial Economics, Elsevier, vol. 57(1), pages 3-34, July.
  7. Jonathan Ingersoll, 2002. "The Subjective and Objective Evaluation of Incentive Stock Options," Yale School of Management Working Papers ysm276, Yale School of Management, revised 01 Jul 2003.
  8. Thaleia Zariphopoulou, 2001. "A solution approach to valuation with unhedgeable risks," Finance and Stochastics, Springer, vol. 5(1), pages 61-82.
  9. Henderson, Vicky & Hobson, David G., 2002. "Real options with constant relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 329-355, December.
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Cited by:
  1. Chia-Ying Chan & Ling-Chu Lee & Ming-Chun Wang, 2010. "Employee stock options pricing and the implication of restricted exercise price: evidence from Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 247-271, February.

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