Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/32178 
Year of Publication: 
2008
Series/Report no.: 
CoFE Discussion Paper No. 08/07
Publisher: 
University of Konstanz, Center of Finance and Econometrics (CoFE), Konstanz
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: 
Document Type: 
Working Paper

Files in This Item:
File
Size
322.02 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.