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Classic financial agency theory recommends compensation through stock options rather than shares to induce risk … excessive risks - a result that cannot be accounted for by classic incentive theory. We develop a basic model in which such risk …-taking behavior is explained based on a richer array of risk attitudes derived from Prospect Theory. We use the model to derive …
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complex compensation packages given to managers, and whether potential biases in individual shareholder beliefs carry over to …
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leverage changes as a result of CEO option compensation changes. The evidence provides strong support for debt agency theory …
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