The subjective valuation of indexed stock options and their incentive effects

Financial Review

Volumn 41, Issue 2, 2006, Pages 205-227

  Calvet, A Louis ^a   Rahman, Abdul H ^a  

^a UNIVERSITY OF OTTAWA   (Canada)

Author keywords

Executive compensation; G12; G13; Incentive compensation; Indexed executive stock options; J32; J33; Managerial risk aversion; Subjective delta; Utility based option valuation

Indexed keywords

EID: 84920760539     PISSN: 07328516     EISSN: 15406288     Source Type: Journal    
DOI: 10.1111/j.1540-6288.2006.00139.x     Document Type: Article

References (36)

1. Aboody, D., 1996. Market valuation of employee stock options, Journal of Accounting and Economics 22, 357-391.
2. Bebchuck, L., and J. Fried., 2004. Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Harvard University Press, Cambridge).
3. Bertrand, M., and S. Mullainathan., 2001. Are executives paid for luck? The ones with principals are, Quarterly Journal of Economics 116, 901-932.
4. Chance, D., and T.-H. Yang., 2004. Black-Scholes, liquidity, and the cost of executive stock options, Working paper, Louisiana State University.
5. Cochrane, J.H., 2001. Asset Pricing (Princeton University Press), Princeton, New Jersey.
6. Core, J.E., and W.R. Guay., 1999. The use of equity grants to manage optimal equity incentive levels, Journal of Accounting and Economics 28, 151-184.
7. Core, J.E., and W.R. Guay., 2001. Stock option plans for nonexecutive employees, Journal of Financial Economics 61, 253-287.
8. Core, J.E., W.R. Guay., and D.F. Larcker., 2003. Executive equity compensation and incentives: A survey, FRBNY Economic Policy Review April, 27-50.
9. Core, J.E., W.R. Guay., and R. Thomas., 2004. Is U.S. CEO compensation inefficient pay without performance? in: L.Bebchuk and J.Fried, eds., A Review of Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Harvard University Press, Cambridge).
10. Damodaran, A., 2005. Damodaran Online. Available at http://pages.stern.nyu.edu/adamodar/.
11. Detemple, J., and S. Sundaresan., 1999. Nontraded asset valuation and portfolio constraints: A binomial approach, Review of Financial Studies 12, 835-872.
12. Garvey, G.T., and T.T. Milbourn., 2006. Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad, Claremont Graduate University (forthcoming in the Journal of Financial Economics).
13. Gibbons, R., and K.J. Murphy., 1990. Relative performance evaluation for chief executive officers, Industrial and Labor Relations Review 43, 30-S-51-S.
14. Hall, B.J., and T. Knox., 2002. Managing option fragility, NBER Working paper series no. 9059, Cambridge, MA.
15. Hall, B.J., and J. Liebman., 1998. Are CEOs really paid like bureaucrats? Quarterly Journal of Economics 103, 653-691.
16. Hall, B.J., and K.J. Murphy., 2000. Optimal exercise prices for executive stock options, American Economic Review 90, 209-214.
17. Hall, B.J., and K.J. Murphy., 2002. Stock options for undiversified investors, Journal of Accounting and Economics 33, 3-42.
18. Hall, B.J., and K.J. Murphy., 2003. The trouble with stock options, Journal of Economic Perspectives 17, 49-70.
19. Hodder, J.E., and J.C. Jackwerth., 2004. Employee stock options: Much more valuable than you thought. Research paper, University of Wisconsin-Madison.
20. Holmström, B., and S.N. Kaplan., 2003. The state of U.S. corporate governance: What’s right and what’s wrong? NBER Working paper series no. 9613, Cambridge, MA.
21. Huddart, S., 1994. Employee stock options, Journal of Accounting and Economics 18, 207-231.
22. Ingersoll, J.E., 2006. The subjective and objective evaluation of incentive index stock options, Journal of Business 79, 453-487.
23. Jensen, M., and K. Murphy., 1990. Performance pay and top-management incentives, Journal of Political Economy 98, 225-264.
24. Jin, L., and L.K. Meulbroek., 2001. Do underwater executive stock options still align incentives? The effect of stock price movements on managerial incentive alignment, Working paper, Harvard Business School.
25. Johnson, S.A., and Y.S. Tian., 2000. Indexed executive stock options, Journal of Financial Economics 57, 35-64.
26. Jorgensen, P.L., 2002. American-style indexed executive stock options, European Finance Review 6, 321-358.
27. Kadam, A., P. Lakner., and A. Srinivasan., 2003. Executive stock options: Value to the executive and cost to the firm, Working paper, New York University.
28. Kulatilaka, N., and A.J. Marcus., 1994. Valuing employee stock options, Financial Analysts Journal 50, 46-56.
29. Lambert, R.A., D.F. Larcker., and R.E. Verrecchia., 1991. Portfolio considerations in valuing executive compensation, Journal of Accounting Research 29 (1), 129-149.
30. Margrabe, W., 1978. The value of an option to exchange one asset for another, Journal of Finance 33, 177-186.
31. Merton, R.C., 1973. Theory of rational option pricing, Bell Journal of Economics and Management Science 4, 141-183.
32. Meulbroek, L.K., 2001. The efficiency of equity-linked compensation: Understanding the full cost of awarding executive stock options, Financial Management 30, 5-30.
33. Murphy, K.C., 1999. Executive compensation, in: O.Ashenfelter and D.Card, eds., Handbook of Labour Economics, volume III (North-Holland Publishing Co., Amsterdam).
34. Murphy, K.C., 2002. Explaining executive compensation: Managerial power versus the perceived cost of stock options, University of Chicago Law Review 69, 847-869.
35. Rappaport, A., 1999. New thinking on how to link-executive pay with performance, Harvard Business Review March/April, 91-101.
36. Rubinstein, M., 1995. On the accounting valuation of employees stock options, Journal of Derivatives Fall 1995.