Incentives of Stock Option Based Compensation
We introduce explicitly the effort as a choice variable in a continuous time utility maximisation framework of an executive who is partly compensated with stock options. We solve the model in the case where the executive is not allowed to trade in the company’s stock but is able to achieve a partial insurance through trading in a correlated market portfolio. We define the executive’s value of the options through a certainty equivalence approach both in the case of European call options and non-standard capped stock options and study the behaviour of the reservation price as relevant parameters change. Copyright Springer Science+Business Media, Inc. 2005
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Volume (Year): 25 (2005)
Issue (Month): 1 (August)
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- Brian J. Hall & Kevin J. Murphy, 2000.
"Optimal Exercise Prices for Executive Stock Options,"
NBER Working Papers
7548, National Bureau of Economic Research, Inc.
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- Thaleia Zariphopoulou, 2001. "A solution approach to valuation with unhedgeable risks," Finance and Stochastics, Springer, vol. 5(1), pages 61-82.
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- Vicky Henderson, 2002. "Stock Based Compensation: Firm-specific risk, Efficiency and Incentives," OFRC Working Papers Series 2002fe01, Oxford Financial Research Centre.
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