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Discussion Papers, Kellogg School of Management, Northwestern University >
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http://hdl.handle.net/10419/31234
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| Title: | | Stock options and chief executive officer compensation  |
| Authors: | | Armstrong, Christopher S. Larcker, David F. Su, Che-Lin |
| Issue Date: | | 2007 |
| Series/Report no.: | | Discussion paper // Center for Mathematical Studies in Economics and Management Science 1447 |
| Abstract: | | Although stock options are commonly observed in chief executive o±cer (CEO) compensation contracts, there is theoretical controversy about whether stock options are part of the optimal contract. Using a sample of Fortune 500 companies, we solve an agency model calibrated to the company-specific data and we find that stock options are almost always part of the optimal contract. This result is robust to alternative assumptions about the level of CEO risk-aversion and the disutility associated with their effort. In a supplementary analysis, we solve for the optimal contract when there are no restrictions on the contract space. We find that the optimal contract (which is characterized as a state-contingent payoff to the CEO) typically has option-like features over the most probable range of outcomes. |
| Subjects: | | Stock options incentives agency model |
| JEL: | | C61 D82 D86 J33 J41 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Discussion Papers, Kellogg School of Management, Northwestern University
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