Does Option Compensation Increase Managerial Risk Appetite?
This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager's optimal policy, the option ends up either deep in or deep out of money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk-seeking. Sometimes, the manager's optimal volatility is less with the option than it would be if he were trading his own account. Furthermore, giving the manager more options causes him to reduce volatility.
|Date of creation:||Aug 1999|
|Date of revision:|
|Contact details of provider:|| Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126|
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Web page: http://w4.stern.nyu.edu/finance/
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