Stock Grants As a Commitment Device
AbstractA large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent 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 higher firm value.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12300.
Date of creation: 01 Nov 2006
Date of revision:
Publication status: Published in Journal of Economic Dynamics and Control, November 2006, vol. 30 no. 11, pp. 2191-2216
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Other versions of this item:
- Gian Luca Clementi & Thomas Cooley & Chen Wang, 2004. "Stock Grants as a Committment Device," Working Papers 04-24, New York University, Leonard N. Stern School of Business, Department of Economics.
- Gian Luca Clementi & Thomas F. Cooley & Cheng Wang, . "Stock Grants as Commitment Device," GSIA Working Papers 2002-E12, Carnegie Mellon University, Tepper School of Business.
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