To Buy or Not to Buy?: The Effect of Option Granting on Executive Stock Purchases

55 Pages Posted: 15 Mar 2006 Last revised: 14 Apr 2010

See all articles by Paul A. Grout

Paul A. Grout

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

Anna Zalewska

University of Bath - Centre for Governance and Regulation; School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2010

Abstract

Traditional portfolio diversification arguments suggest that if executives are granted options then they should hold less company stock than they would otherwise have done, diluting the incentive effects. There is little evidence, however, that companies do anything to prevent this and the anecdotal evidence does not seem to accord with traditional diversification arguments. We provide a model analyzing the effect of granting options on executive stock purchases and, in contrast to the traditional view, show that there is a natural complementarity between executive options and stock ownership, which, although intuitively straightforward, has not been identified before. The implications are explored.

Keywords: CEO compensation, managerial incentives, asymmetric information, corporate governance

JEL Classification: G30, G32, J33,

Suggested Citation

Grout, Paul A. and Zalewska, Anna, To Buy or Not to Buy?: The Effect of Option Granting on Executive Stock Purchases (April 1, 2010). Available at SSRN: https://ssrn.com/abstract=891070 or http://dx.doi.org/10.2139/ssrn.891070

Paul A. Grout

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO) ( email )

Mary Paley Building
12 Priory Road Department of Economics
Bristol BS8 1TN
United Kingdom

Anna Zalewska (Contact Author)

University of Bath - Centre for Governance and Regulation; School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
+44 0 1225 384354 (Phone)
+44 0 1226 384354 (Fax)

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