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Title:Managerial responses to incentives: control of firm risk, derivative pricing implications, and outside wealth management PDF Logo
Authors:Jackwerth, Jens Carsten
Hodder, James E.
Issue Date:2008
Series/Report no.:Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2008,07
Abstract:We model a firm's value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage gap between his certainty equivalent and the firm's fair value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile.
Persistent Identifier of the first edition:urn:nbn:de:bsz:352-opus-54367
Document Type:Working Paper
Appears in Collections:CoFE-Diskussionspapiere, Universität Konstanz

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