Stock Grants as a Commitment Device

Gian Luca Clementi (), Thomas Cooley () and Cheng Wang

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: A large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts. We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and higher firm value.

Keywords: Moral Hazard; Optimal Contracts; CEO Compensation; Stock Grants (search for similar items in EconPapers)
JEL-codes: D2 D8 G3 (search for similar items in EconPapers)
Date: 2005-04-26

Published in Journal of Economic Dynamics and Control, November 2006, Vol. 30, No. 11, pp. 2191-2216.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Stock Grants as a Committment Device (2004)
Working Paper: Stock Grants as Commitment Device
Journal Article: Stock grants as a commitment device (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12300

Access Statistics for this paper

More papers in Staff General Research Papers from Iowa State University, Department of Economics
Address: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Contact information at EDIRC.
Series data maintained by Stephanie Bridges ().