This paper develops a new pricing model for American-style indexed executive stock options. The indexation scheme is as proposed by Johnson and Tian (2000). The derivation of the valuation formula represents an instructive example of the usefulness of the change-of-numeraire technique. In the...

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...

Firms grant to their employees non-tradable stock options as an incentive device. Is the opportunity cost of issuing these options equal to the amount the company would receive if it sold the same options to outside investors? No, it is not, since the options granted to employees are non...

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...

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...

In this paper, I examine the optimal contracting problem between a firm and its chief executive officer in a principal-agent framework with information asymmetry. The firm (principal) selects the size and composition of the agent's (executive's) compensation in order to maximize firm value....

Over the last decade the Danish corporate environment has experienced a significant increase in the use of option-based compensation (OBC). This and many other facts are documented in the present paper which provides the first insights into the characteristics of the option and warrant contracts...

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,...

We present a tax motivation for the use of employee stock options (ESO) in compensation schemes, based on the advantageous treatment allowed for a firm hedging positions written on its own securities. In a binomial option framework, we show that a cost saving on the order of 10-15% of...

The cost of backdating of executive stock options is found to be relatively modest, even prior to the Sarbanes-Oxley act. We identify the backdating possibility as a version of a European lookback option. Under the Sarbanes-Oxley Act we identify this possibility as a particular American lookback...