To Buy or Not to Buy?: The Effect of Option Granting on Executive Stock Purchases
Paul A. Grout
University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)
University of Bath - Centre for Governance and Regulation; School of Management
Traditional portfolio diversification arguments suggest that if executives are granted options then they should hold less company stock than they would otherwise have done, diluting the incentive effects. There is little evidence, however, that companies do anything to prevent this and the anecdotal evidence does not seem to accord with traditional diversification arguments. We provide a model analyzing the effect of granting options on executive stock purchases and, in contrast to the traditional view, show that there is a natural complementarity between executive options and stock ownership, which, although intuitively straightforward, has not been identified before. The implications are explored.
Number of Pages in PDF File: 55
Keywords: CEO compensation, managerial incentives, asymmetric information, corporate governance
JEL Classification: G30, G32, J33working papers series
Date posted: February 27, 2007 ; Last revised: April 16, 2010
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