We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs' and firms' outside options and captures...

Much of the agency literature focuses on effort-inducing while little attention is paid to the participation constraint. Intuitively, it is important to jointly address both for CEOs. This paper achieves this by developing a dynamic search equilibrium model which allows for quitting if a CEO is...

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)...

Employee stock options (ESOs) are American-style call options that can be terminated early due to employment shock. This paper studies an ESO valuation framework that accounts for job termination risk and jumps in the company stock price. Under general Levy stock price dynamics, we show that a...

Prior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true on the grant date, it is not over the life of the option grant. Very little of the initial...

Incentive options are held by managers and employees who invariably hold undiversified portfolios with substantial amounts invested in their own company's common stock. This lack of diversification makes the subjective value of incentive items such as options less than their market value. This...

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...