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Should executive stock options be abandoned?

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journal contribution
posted on 2006-12-01, 00:00 authored by C Choe, Xiangkang YinXiangkang Yin
Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case. © 2006, SAGE Publications. All rights reserved.

History

Journal

Australian journal of management

Volume

31

Pagination

163-179

Location

London, Eng.

Open access

  • Yes

ISSN

0312-8962

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2006, The Australian Graduate School of Management

Issue

2

Publisher

Sage Publications

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