Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management

Jens Carsten Jackwerth and James E. Hodder

MPRA Paper from University Library of Munich, Germany

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 dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage 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.

Keywords: Risk; Wealth Management; Derivative (search for similar items in EconPapers)
JEL-codes: G3 G32 (search for similar items in EconPapers)
Date: 2008-02-25
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Managerial responses to incentives: Control of firm risk, derivative pricing implications, and outside wealth management (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11643

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