Options, option repricing in managerial compensation: Their effects on corporate investment risk

Nengjiu Ju, Hayne Leland and Lemma W. Senbet

Journal of Corporate Finance, 2014, vol. 29, issue C, 628-643

Abstract: While stock options are commonly used in managerial compensation to provide desirable incentives, they can create adverse incentives to distort the choice of investment risk. Relative to the risk level that maximizes firm value, call options in a compensation contract can induce too much or too little corporate risk-taking, depending on managerial risk aversion and the underlying investment technology. We show that inclusion of lookback call options in compensation packages has desirable countervailing effects on managerial choice of corporate risk policies and can induce risk policies that increase shareholder wealth. We argue that lookback call options are analogous to the observed practice of option repricing.

Keywords: Managerial stock options; Option repricing; Lookback options; Corporate investment risk (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:29:y:2014:i:c:p:628-643

DOI: 10.1016/j.jcorpfin.2013.11.003

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