Should Executive Stock Options Be Abandoned?

20 Pages Posted: 6 Oct 2004

See all articles by Chongwoo Choe

Chongwoo Choe

Monash University - Department of Economics

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: September 26, 2004

Abstract

Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is unwarranted and unfortunate. Using a simple, but general principal-agent model with moral-hazard, this paper compares option-based contracts with stock-based contracts. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral.

Keywords: Executive stock options, restricted stock, optimal contract

JEL Classification: D82, G32, J33

Suggested Citation

Choe, Chongwoo and Yin, Xiangkang, Should Executive Stock Options Be Abandoned? (September 26, 2004). Available at SSRN: https://ssrn.com/abstract=600281 or http://dx.doi.org/10.2139/ssrn.600281

Chongwoo Choe

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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