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Stock Options and Chief Executive Officer CompensationChris ArmstrongUniversity of Pennsylvania - Accounting Department David F. LarckerStanford University - Graduate School of Business Che-Lin SuUniversity of Chicago Booth School of Business May 15, 2007 Operations Research, Vol. 58, No. 4, Part 2 of 2, July–August 2010, pp. 1090–1106 Rock Center for Corporate Governance Working Paper No. 27 Abstract: Although stock options are commonly observed in chief executive officer (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. Paper published as: "Endogenous Selection and Moral Hazard in Compensation Contracts" in Operations Research, Linthicum 58 (July/August 2010): 1090-1106.
Number of Pages in PDF File: 48 Keywords: Stock Options, Incentives, Agency Model JEL Classification: C61, D82, D86, J33, J41 Accepted Paper SeriesDate posted: May 21, 2007 ; Last revised: November 6, 2012Suggested CitationContact Information
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