Advanced Search
MyIDEAS: Login

Stock Grants as Commitment Device

Contents:

Author Info

  • Gian Luca Clementi
  • Thomas F. Cooley
  • Cheng Wang

Abstract

A large and increasing fraction of the value of executives' compensation is accounted for by security grants. It is often argued that the optimal compensation contracts characterized in the theoretical literature can be implemented by means of stock or option grants. However, in most cases the optimal allocation can be implemented simply by a contingent sequence of cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts. We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and larger firm value.

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://rimini.tepper.cmu.edu/Papers/stock.pdf
Our checks indicate that this address may not be valid because: 500 Can't connect to rimini.tepper.cmu.edu:80 (Bad hostname). If this is indeed the case, please notify (Steve Spear)
Download Restriction: no

Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2002-E12.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:cmu:gsiawp:1025802450

Contact details of provider:
Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

Order Information:
Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Toshihiko Mukoyama & Ayşegül Şahin, 2005. "Repeated moral hazard with persistence," Economic Theory, Springer, vol. 25(4), pages 831-854, 06.
  2. Gian Luca Clementi & Thomas F. Cooley, . "Sensitivity of CEO Pay to Shareholder Wealth in a Dynamic Agency Model," GSIA Working Papers 2002-E13, Carnegie Mellon University, Tepper School of Business.
  3. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 258-76, April.
  4. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  5. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  6. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December.
  7. Andrei Shleifer & Lawrence H. Summers, 1989. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc.
  8. Manuel Santos & Jorge Aseff, . "Stock Options and Managerial Optimal Contracts," Working Papers 2133304, Department of Economics, W. P. Carey School of Business, Arizona State University.
  9. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
  10. Viral Acharya & Kose John & Rangarajan K. Sundaram, 1999. "On the Optimality of Resetting Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-087, New York University, Leonard N. Stern School of Business-.
  11. Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers 5170, Iowa State University, Department of Economics.
  12. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Mele, Antonio, 2010. "Repeated moral hazard and recursive Lagrangeans," MPRA Paper 21741, University Library of Munich, Germany.
  2. Hanno Lustig & Chad Syverson & Stijn Van Nieuwerburgh, 2009. "Technological Change and the Growing Inequality in Managerial Compensation," NBER Working Papers 14661, National Bureau of Economic Research, Inc.
  3. Gian Luca Clementi & Thomas Cooley, 2009. "Executive Compensation: Facts," Working Paper Series 46_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  4. Thomas Cooley & Ramon Marimon & Vincenzo Quadrini, 2013. "Risky Investments with Limited Commitment," Working Papers 13-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Arantxa Jarque, 2008. "CEO compensation : trends, market changes, and regulation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 265-300.
  6. M. Imtiaz Mazumder & Nazneen Ahmad, 2010. "Greed, financial innovation or laxity of regulation?: A close look into the 2007-2009 financial crisis and stock market volatility," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(2), pages 110-134, June.
  7. Arantxa Jarque, 2008. "Optimal CEO compensation and stock options," Working Papers. Serie EC 2008-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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:cmu:gsiawp:1025802450. 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: (Steve Spear).

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.