Does Option Compensation Increase Managerial Risk Appetite?

31 Pages Posted: 11 Nov 2008

See all articles by Jennifer N. Carpenter

Jennifer N. Carpenter

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager's optimal policy, the option ends up either deep in or deep out of money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk-seeking. Sometimes, the manager's optimal volatility is less with the option than it would be if he were trading his own account. Furthermore, giving the manager more options causes him to reduce volatility.

Suggested Citation

Carpenter, Jennifer N., Does Option Compensation Increase Managerial Risk Appetite? (August 1999). NYU Working Paper No. FIN-99-076, Available at SSRN: https://ssrn.com/abstract=1299445

Jennifer N. Carpenter (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0352 (Phone)
212-995-4233 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
92
Abstract Views
854
Rank
252,827
PlumX Metrics