We introduce a theoretical model of executives with insider information who receive executive stock options (ESOs) as incentives and optimize their “outside wealth” portfolios. We show that insider information nullifies ESO incentivizing, misaligning executives' and shareholders' interests....

To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic...

We derive a simple formula for the cost of the ESO to the firm at the grant date under the assumption that the executive has a constant market-to-strike multiple. The market-to-strike multiple is defined as the ratio of the market price on exercise to the strike price of the ESO. The expected...

This paper derives continuous-time conditions for a manager compensated with a call option to increase risk-taking. We show that the principles proposed by Ross (2004) in a one-period environment remain valid in continuous time

This paper solves the dynamic investment problem of a risk averse agent compensated with a performance related bonus plus a salary guaranteed up to a certain level of underperformance. The main contribution is to explicitly take into account the financial fragility of the principal [employer],...

This paper examines whether the risk-taking incentives induced by performance-based vesting (p-v) compensation influence bank loan contracting and credit ratings. Consistent with our risk-shifting hypothesis, we find that the p-v based compensation, as measured by the proportion of grant date...

Executive compensation is designed to create incentives for CEOs to act in the best interest of shareholders. Short-term (bonus) and equity-based incentives induce risk taking behaviors of the CEO that could further change a firm's risk exposure. This article examines the linkage between...

This paper analyzes the impact of price targets from the IBES Detail Price History Target database on executive compensation. I find that analysts' price targets alter the composition of executive pay. In particular, I find that when analysts forecast a rise in the share price for a firm, the...

The usage of performance-vesting (p-v) equity awards to top executives in large U.S. companies has grown from 20 to 70 percent from 1998 to 2012. We measure the effects of p-v provisions on value, delta, and vega of equity-based compensation. We find large differences in the value of p-v awards...

This paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a...