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Equity, Options, and Bank Strategies

Author

Listed:
  • Alberto Razul

    (Polytechnic University, Mozambique)

  • Orlando Gomes

    (Lisbon Polytechnic Institute (ISCAL-IPL)
    CEFAGE (Univ. Évora - ISCAL) Research Center)

  • Mohamed Azzim Gulamhussen

    (Lisbon University Institute (ISCTE Business School))

Abstract

We build on existing literature to develop a stylized model of a bank in which managers can receive variable pay through stocks or options. The model shows both modalities aligning managers' and shareholders' interests. However, options allow determining a performance contingent optimal. This options' feature is desirable in mitigating perverse implications for depositors emerging from the alignment of managers' and shareholders' interests through equity. Exercises against the model's simulated and real data corroborate the model's findings. Our findings can be useful for banks in setting variable pay modes and regulators and supervisors in addressing the implications of different pay modes.

Suggested Citation

  • Alberto Razul & Orlando Gomes & Mohamed Azzim Gulamhussen, 2025. "Equity, Options, and Bank Strategies," Annals of Economics and Finance, Society for AEF, vol. 26(1), pages 333-359, May.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:1:razulgomesgulamhussen
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    More about this item

    Keywords

    Financial incentives; Managerial compensation; Banking sector; Equity-based pay; Stock options;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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