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Should Executive Stock Options Be Abandoned?

Chongwoo Choe () and Xiangkang Yin

Australian Journal of Management, 2006, vol. 31, issue 2, 163-179

Abstract: 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.

Keywords: EXECUTIVE STOCK OPTIONS; RESTRICTED STOCK; OPTIMAL CONTRACT (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:31:y:2006:i:2:p:163-179

DOI: 10.1177/031289620603100201

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