Stock options for undiversified executives

• Autores: Brian J. Hall, Kevin J. Murphy
• Localización: Journal of accounting and economics, ISSN 0165-4101, Vol. 33, Nº. 1, 2002, págs. 3-42
• Idioma: inglés
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• Resumen

  • 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 “executive value” lines, the risk-adjusted analogues to Black–Scholes lines. We show that distinguishing between “executive value” and “company cost” provides insight into many issues regarding stock option practice including: executive views about Black–Scholes values; tradeoffs between options, restricted stock and cash; exercise price policies; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.