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Options, option repricing in managerial compensation: Their effects on corporate investment risk

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  • Ju, Nengjiu
  • Leland, Hayne
  • Senbet, Lemma W.

Abstract

While stock options are commonly used in managerial compensation to provide desirable incentives, they can create adverse incentives to distort the choice of investment risk. Relative to the risk level that maximizes firm value, call options in a compensation contract can induce too much or too little corporate risk-taking, depending on managerial risk aversion and the underlying investment technology. We show that inclusion of lookback call options in compensation packages has desirable countervailing effects on managerial choice of corporate risk policies and can induce risk policies that increase shareholder wealth. We argue that lookback call options are analogous to the observed practice of option repricing.

Suggested Citation

  • Ju, Nengjiu & Leland, Hayne & Senbet, Lemma W., 2014. "Options, option repricing in managerial compensation: Their effects on corporate investment risk," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 628-643.
  • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:628-643
    DOI: 10.1016/j.jcorpfin.2013.11.003
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    Cited by:

    1. repec:grm:ecoyun:201705 is not listed on IDEAS
    2. Eitan Moshe Goldman & Peggy Peiju Huang, 2015. "Contractual vs. Actual Separation Pay Following CEO Turnover," Management Science, INFORMS, vol. 61(5), pages 1108-1120, May.
    3. repec:gam:jsusta:v:10:y:2018:i:10:p:3484-:d:172704 is not listed on IDEAS

    More about this item

    Keywords

    Managerial stock options; Option repricing; Lookback options; Corporate investment risk;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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