IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v21y2008i1p451-482.html
   My bibliography  Save this article

Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts

Author

Listed:
  • Ohad Kadan

Abstract

We consider the choice between stocks and options to provide effort incentives to a risk-averse manager. We show that stocks can dominate options as a means of motivation only if nonviability risk is substantial, as in financially distressed firms or start-ups. Options dominate stocks for other firms. These results hold regardless of the existing portfolio of the manager. We provide empirical evidence that higher bankruptcy risk is indeed correlated with more use of stock. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Ohad Kadan, 2008. "Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 451-482, January.
    • Handle: RePEc:oup:rfinst:v:21:y:2008:i:1:p:451-482
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhm077
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charitou, Andreas & Dionysiou, Dionysia & Lambertides, Neophytos & Trigeorgis, Lenos, 2013. "Alternative bankruptcy prediction models using option-pricing theory," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2329-2341.
    2. Hori, Keiichi & Osano, Hiroshi, 2014. "Investment timing decisions of managers under endogenous contracts," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 607-627.
    3. repec:eee:ecmode:v:71:y:2018:i:c:p:16-24 is not listed on IDEAS
    4. Hongfei Tang, 2014. "Are CEO stock option grants optimal? Evidence from family firms and non-family firms around the Sarbanes–Oxley Act," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 251-292, February.
    5. Jewitt, Ian & Kadan, Ohad & Swinkels, Jeroen M., 2008. "Moral hazard with bounded payments," Journal of Economic Theory, Elsevier, vol. 143(1), pages 59-82, November.
    6. Hsiaw, Alice, 2013. "Goal-setting and self-control," Journal of Economic Theory, Elsevier, vol. 148(2), pages 601-626.
    7. repec:eee:jfinec:v:128:y:2018:i:2:p:378-401 is not listed on IDEAS
    8. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 79-101.
    9. Chan, Chia-Ying & Chou, De-Wai & Lin, Jane-Raung & Liu, Feng-Ying, 2016. "The role of corporate governance in forecasting bankruptcy: Pre- and post-SOX enactment," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 166-188.
    10. Wu, Yan Wendy, 2011. "Optimal executive compensation: Stock options or restricted stocks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 633-644, October.
    11. Bo Sun, 2013. "The optimal shape of compensation contracts with earnings management," Applied Economics, Taylor & Francis Journals, vol. 45(21), pages 3102-3109, July.
    12. Ellul, Andrew & Wang, Cong & Zhang, Kuo, 2016. "Labor Unemployment Risk and CEO Incentive Compensation," CEPR Discussion Papers 11634, C.E.P.R. Discussion Papers.
    13. Arantxa Jarque, 2008. "Optimal CEO compensation and stock options," Working Papers. Serie EC 2008-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:21:y:2008:i:1:p:451-482. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.