The efficiency and incentive effects of executive stock option contracts: a comparison

• Main Authors: Chiou-Ping Jian, 簡秋萍
• Other Authors: Shyan-Yuan Lee
• Format: Others
• Language: zh-TW
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/77063926412398839760

碩士 === 國立臺灣大學 === 財務金融學研究所 === 90 === This paper extended Hall & Murphy (2000) basing on Utility Maximized Model to calculate the firm cost and contract value 6 kinds of executive stock option contracts, Standard stock option, Premium stock option, Purchased stock option, Performance-vested stock option, Repriced stock option, and Indexed stock option. Because each executive has different utility function, the absolute value calculated given assumed utility function is less convictive. I compared the relative V/C ratio of those contract styles to find out the best contract with highest efficiency, i.e. highest contract value per unit of firm cost. Higher efficiency means lest risk premium required by executives, and thus save the total cost for firms to issue executive stock options. While Johnson & Tian (1999) used partial derivative of cost, , to compare the incentive effect of executive stock options, I used partial derivative of value, , which is logically more correct because what executives care about is value, not cost, of stock options. As a result, the Indexed stock option is the best contract style among the 6 and Repriced stock option is the worst. Both the value and cost of contracts dropped with higher risk aversion and lower diversification, but value dropped more. While considering dilution effect, the contract value is eroded much more than firm cost. That’s because the value of stocks hold by un-diversified executives is damaged by dilution effect as well. Therefore, the expected utility of holding executive stock option will be lower as well as contract value calculated. Meanwhile, the valuation techniques to calculate firm cost of different executive stock option contract styles could be applied to calculate the “fair value” FASB suggested.