This paper examines how an option plan that rewards managers for firm performance relative to some market or industry benchmark should be structured. Relative-performance-based compensation advocates contend that conventional stock options do not adequately discriminate between strong and weak...

This study presents significant factors that affect firms' decision whether to repurchase shares or not. Empirical results show that when the debt ratio is lower, the stock price is seriously underpriced and the firm size is larger, firms tend to buyback their own shares. Regarding employee...

We derive a pricing model for employee stock options (ESO) that expands on Ingersoll (2006) by including default risk and that additionally considers the effects of employee over-confidence. We find that illiquidity reduces subjective value and alters incentive effects and value sensitivities....

We employ a certainty-equivalence framework to analyze the cost, value and pay/performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive quot;Executive Valuequot; lines, the risk-adjusted analogs to Black-Scholes lines. We show that distinguishing...

We study derivative instruments that corporate insiders use to diversify and hedge their equity ownership. Our evidence suggests that boards might allow use of these instruments in order to mitigate agency costs associated with overvalued equity and high equity-based pay. These instruments are...

It is often argued that Black-Scholes (1973) values overstate the subjective value of stock options granted to risk-averse and under-diversified executives. We construct a quot;representativequot; Swiss executive and extend the certainty-equivalence approach presented by Hall and Murphy (2002)...

We employ a certainty-equivalence framework to analyze the cost, value and pay/performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive quot;Executive Valuequot; lines, the risk-adjusted analogues to Black-Scholes lines. We show that distinguishing...

This paper analyzes the effect of restricted stock options and restricted stock grants on managerial effort incentives. The combination of low managerial valuations of options and inefficient incentive creation makes options inferior means of inducing managerial effort incentives. The negative...

Executive stock option (ESO) grants have a number of important features that do not conform with the Black-Scholes model. This paper presents a risk-neutral model for valuing such options where the holder is exposed to multiple severance risks (e.g. termination with cause, without cause,...