Stocks or Options: Risk Choices and Compensation Design
نویسندگان
چکیده
We analyze the impact of the existence of bad-tail risks on the decision to pay managers in stocks or in options and find that, contrary to conventional wisdom that options incent higher risk-taking, options are sometimes the superior vehicle for limiting managerial incentives to take bad-tail risks. Though options have not been the dominant form of compensation in the financial services industry in recent years, options are optimal under a condition similar to second-order stochastic dominance. While conventional options can incent the desired project choice under some dominance circumstances, collar-like options can do so in a wide variety of circumstances. Shareholder mistakes in choosing vehicles for executive compensation may have contributed to executives’ incentives to take tail risks.
منابع مشابه
Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts
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