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Should executive stock options be abandoned?

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  • Choe, Chongwoo
  • Yin, Xiangkang

Abstract

Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral-hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case.

Suggested Citation

  • Choe, Chongwoo & Yin, Xiangkang, 2006. "Should executive stock options be abandoned?," MPRA Paper 13760, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13760
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    References listed on IDEAS

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    Cited by:

    1. Mahmoud Agha, 2016. "Agency costs, executive incentives and corporate financial decisions," Australian Journal of Management, Australian School of Business, vol. 41(3), pages 425-458, August.
    2. Jacob M. Rose & Alisa G. Brink & Carolyn Strand Norman, 2018. "The Effects of Compensation Structures and Monetary Rewards on Managers’ Decisions to Blow the Whistle," Journal of Business Ethics, Springer, vol. 150(3), pages 853-862, July.
    3. Elizabeth N. K. Lim, 2015. "The role of reference point in CEO restricted stock and its impact on R&D intensity in high-technology firms," Strategic Management Journal, Wiley Blackwell, vol. 36(6), pages 872-889, June.
    4. Robert E. Marks, 2007. "The Old Order Changeth," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 0-3, December.
    5. Jamie Alcock & Godfrey Smith, 2017. "Non-parametric American option valuation using Cressie–Read divergences," Australian Journal of Management, Australian School of Business, vol. 42(2), pages 252-275, May.
    6. 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

    EXECUTIVE STOCK OPTIONS; RESTRICTED STOCK; OPTIMAL CONTRACT;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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