Advanced Search
MyIDEAS: Login

Estimating the Cost of Executive Stock Options: Evidence from Switzerland

Contents:

Author Info

  • Wolfgang Drobetz
  • Pascal Pensa
  • Markus M. Schmid

    (University of Basel)

Registered author(s):

    Abstract

    It is often argued that Black-Scholes (1973) values overstate the subjective value of stock options granted to risk-averse and under-diversified executives. We construct a “representative” Swiss executive and extend the certainty- equivalence approach presented by Hall and Murphy (2002) to assess the value-cost wedge of executive stock options. Even with low coefficients of relative risk aversion, the discount can be above 50% compared to the Black-Scholes values. Regression analysis reveals that the equilibrium level of executive compensation is explained by economic determinant variables such as firm size and growth opportunities, whereas the managers’ pay-forperformance sensitivity remains largely unexplained. Firms with larger boards of directors pay higher wages, indicating potentially unresolved agency conflicts. We reject the hypothesis that cross-sectional differences in the amount of executive pay vanish when risk-adjusted values are used as the dependent variable.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://wwz.unibas.ch/uploads/tx_x4epublication/17_07.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2007/17.

    as in new window
    Length:
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:bsl:wpaper:2007/17

    Contact details of provider:
    Postal: Peter-Merian-Weg 6, Postfach, CH-4002 Basel
    Web page: http://wwz.unibas.ch
    More information through EDIRC

    Related research

    Keywords: Managerial compensation; incentives; executive stock options; option valuation; risk aversion;

    Find related papers by JEL classification:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bsl:wpaper:2007/17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (WWZ).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.