Do Stock Options Always Align Manager and Shareholders’ Interests? An Alternative Perspective

Advances in Financial Education (Volume 4, Fall 2006, pages 1 – 16)

Fox School of Business Research Paper

17 Pages Posted: 16 Sep 2019

See all articles by Morris G. Danielson

Morris G. Danielson

Saint Joseph's University - Department of Finance

Eric Press

Temple University - Department of Accounting

Date Written: July 7, 2006

Abstract

Shareholders want managers to invest in all positive net present value (NPV) projects, and to avoid those with negative NPV. Using a simple model of firm value, we explain why stock op-tions—when issued by firms with high price-to-book value ratios—do not always provide the incentive for managers to pursue these value-maximizing policies. This is noteworthy because option usage in the late 1990s was concentrated in the sort of firm—those with high P/B rati-os—in which they can be least effective. Our model gives students the opportunity to integrate and apply concepts from stock valuation and capital budgeting, and to think critically about the relative merits of stock options and restricted stock as forms of incentive compensation.

Keywords: Stock Options, Agency Costs, Incentive Compensation

JEL Classification: G30

Suggested Citation

Danielson, Morris G. and Press, Eric G., Do Stock Options Always Align Manager and Shareholders’ Interests? An Alternative Perspective (July 7, 2006). Advances in Financial Education (Volume 4, Fall 2006, pages 1 – 16), Fox School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3449706

Morris G. Danielson (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

Eric G. Press

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-8127 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://oll.temple.edu/epress/

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