A Stock Option Based Incentive Scheme with an Endogenous Strike Price

O. Haltia and M. Leppamaki

University of Helsinki, Department of Economics from Department of Economics

Abstract: This paper examines the implications of corporate manager's tendency to promote her private benefits by realizing inefficient investments that incurs a cost for shareholders in terms of lost shareholder value. Under reasonable conditions, we derive an expression for such a loss and propose a compensation scheme providing an incentive to avoid inefficent investments. The scheme amends the well-established linear incentive scheme with a call option, the strike price of which is endogenously determined by the scale of corporate investment as well as investment returns in alternative equally risky projects.

Keywords: PRICES; CAPITAL; SHAREHOLDERS (search for similar items in EconPapers)
JEL-codes: D21 D80 G31 G34 J33 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:fth:helsec:480

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