Stock Options for Undiversified Executives

Hall, Brian J.; Murphy, Kevin J.

doi:10.2139/ssrn.252805

Download This Paper

Open PDF in Browser

Add Paper to My Library

Stock Options for Undiversified Executives

55 Pages Posted: 14 Dec 2000

See all articles by Brian J. Hall

Brian J. Hall

NOM Unit Head, Harvard Business School; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

There are 3 versions of this paper

Date Written: November 2001

Abstract

We employ a certainty-equivalence framework to analyze the cost, value and pay/performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive "Executive Value" lines, the risk-adjusted analogues to Black-Scholes lines. We show that distinguishing between "executive value" and "company cost" provides insight into many issue regarding stock option practice including: executive views about Black-Scholes values; tradeoffs between options, restricted stock and cash; exercise price policies; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.

Keywords: Executive Compensation, Incentives, Stock Options, Risk Aversion

JEL Classification: J33, J44, G13, G32, M12

Suggested Citation: Suggested Citation

Hall, Brian and Murphy, Kevin J., Stock Options for Undiversified Executives (November 2001). Available at SSRN: https://ssrn.com/abstract=252805 or http://dx.doi.org/10.2139/ssrn.252805