yin-shouldexecutivestock-2006.pdf (239.4 kB)
Should executive stock options be abandoned?
Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case. © 2006, SAGE Publications. All rights reserved.
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Journal
Australian journal of managementVolume
31Issue
2Pagination
163 - 179Publisher
Sage PublicationsLocation
London, Eng.Publisher DOI
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0312-8962Language
engPublication classification
C1.1 Refereed article in a scholarly journal; C Journal articleCopyright notice
2006, The Australian Graduate School of ManagementUsage metrics
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