Executive Options with Inflated Equity Prices

55 Pages Posted: 11 Sep 2008 Last revised: 4 Jun 2010

See all articles by Linus Wilson

Linus Wilson

University of Louisiana at Lafayette - College of Business Administration

Yan Wendy Wu

Wilfrid Laurier University

Date Written: June 2, 2010

Abstract

This study solves the optimal managerial compensation problem when shareholders are either naïvely optimistic or rational. The results suggest that boards of directors should decrease option grants to CEOs when equity is likely to be irrationally overvalued at the date when the CEO’s options vest. The implications of the model are consistent with the available empirical evidence. In addition, the model generates new testable predictions about managerial stock price manipulation, the number of options granted, and the magnitude of the options’ strike prices that have not yet been formally tested.

Keywords: behavioral finance, CEO, executive compensation, fraud, options, strike price

JEL Classification: G32, G34, J33, M52

Suggested Citation

Wilson, Linus and Wu, Yan Wendy, Executive Options with Inflated Equity Prices (June 2, 2010). Available at SSRN: https://ssrn.com/abstract=1265827 or http://dx.doi.org/10.2139/ssrn.1265827

Linus Wilson (Contact Author)

University of Louisiana at Lafayette - College of Business Administration ( email )

Department of Economics & Finance
214 Hebrard Blvd., Room 326
Lafayette, LA 70504-0200
United States
(337) 482-6209 (Phone)
(337) 482-6675 (Fax)

HOME PAGE: http://www.linuswilson.com

Yan Wendy Wu

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

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