Should executive stock options be abandoned?
Chongwoo Choe and
Xiangkang Yin
MPRA Paper from University Library of Munich, Germany
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)
JEL-codes: D82 G30 J33 (search for similar items in EconPapers)
Date: 2006-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13760/1/MPRA_paper_13760.pdf original version (application/pdf)
Related works:
Journal Article: Should Executive Stock Options Be Abandoned? (2006) 
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:pra:mprapa:13760
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().