Managerial responses to incentives: Control of firm risk, derivative pricing implications, and outside wealth management

James E. Hodder and Jens Carsten Jackwerth

Journal of Banking & Finance, 2011, vol. 35, issue 6, 1507-1518

Abstract: We model a firm's value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also controls allocation of his outside wealth, which allows partially hedging of his exposure to firm risk. Managerial control increases the expected time to exercise for his employee stock options. It also reduces the gap between his certainty equivalent and the firm's Fair Value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile. With costly control the same basic patterns remain, but the manager's risk-taking is dampened.

Keywords: Optimal; risk-taking; Managerial; control; Derivatives (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00426-7
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management (2008)
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: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:6:p:1507-1518

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().