Options, option repricing in managerial compensation: Their effects on corporate investment risk
نویسندگان
چکیده
Article history: Received 1 August 2012 Received in revised form 26 September 2013 Accepted 3 November 2013 Available online xxxx While stock options are commonly used in managerial compensation to provide desirable incentives, they can create adverse incentives to distort the choice of investment risk. Relative to the risk level that maximizes firm value, call options in a compensation contract can induce too much or too little corporate risk-taking, depending on managerial risk aversion and the underlying investment technology. We show that inclusion of lookback call options in compensation packages has desirable countervailing effects on managerial choice of corporate risk policies and can induce risk policies that increase shareholder wealth. We argue that lookback call options are analogous to the observed practice of option repricing. © 2013 Elsevier B.V. All rights reserved. JEL classification: G32 G34
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