BibTeX
@MISC{Aseff03stockoptions,
author = {Jorge G. Aseff and et al.},
title = {Stock Options and Managerial Optimal Contracts },
year = {2003}
}
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Abstract
In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a package of call options on the firm’s stock. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some computational algorithms and a methodology for the calibration of a standard principal-agent model based upon observed CEO earnings schedules and the volatility of the firm’s value in the stock market. These methods are useful to address some important issues such as the sensitivity of compensation to changes in firm’s characteristics, the degree of risk aversion compatible with current earnings profiles, and the performance of stock option contracts.
Keyphrases
stock option managerial optimal contract stock option contract fixed payment standard principal-agent model call option current earnings profile strike price stock market simple framework intermediate role risk aversion observed ceo earnings schedule firm characteristic managerial incentive important issue option grant computational algorithm
