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Title:Stock options and chief executive officer compensation PDF Logo
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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