We provide a two state-variable discrete-time executive option valuation model that allows optimal investment of executive's outside wealth in the riskfree asset and the market portfolio. Our model adopts Rubinstein (1994) rainbow option pricing grid and leads to several improvements over the...

SYNOPSIS: The compensation committee of Level 3 Communications will soon meet to re-evaluate the indexed executive stock option plan used to compensate its top managers and other employees. This review takes place within the context of a troubled telecommunications industry; like many firms in...

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...

Using a utility-maximization framework, I show that the incentive to increase stock price does not always increase as more options are granted. Keeping the total cost of his compensation fixed, granting more options creates greater incentives to increase stock price only if option wealth does...

This paper extends the investigation of the effect of managerial motives on hedging policy. I utilize a proxy variable that incorporates CEO incentives to increase risk relative to incentives to increase stock price. The variable is directly measured using observed characteristics of CEO...

I analyze the value of a nonstandard call option that allows the holder to purchase an underlying asset at a discount proportional to the asset's market price. Several applications for this type of option exist, including its use in employee compensation contracts. I derive the value of this...

We consider the optimal exercise of a portfolio of American call options in an incomplete market. Options are written on a single underlying asset but may have different characteristics of strikes, maturities and vesting dates.Our motivation is to model the decision faced by an employee who is...

Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Executives who have the opportunity to backdate should take this into account in their valuation. We quantify the value to a risk averse executive of...

We design and derive a pricing model for an executive stock option with a strike price indexed to a benchmark and investigate its valuation and incentive implications. In both up and down markets, the indexed option filters out common risks beyond the executive's control, thereby increasing the...