On the optimality of resetting executive stock options

Acharya, Viral V.; John, Kose; Sundaram, Rangarajan K.

doi:10.1016/s0304-405x(00)00051-9

Cited by 168 publications

(110 citation statements)

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“…1 We assume that a signal about the e¤ect of the former is observed at the beginning of period 2 and re ‡ected in the stock price. We then posit that the degrees of 'precision'with which e¤orts can be inferred di¤er across the two types of e¤ort, so that di¤erent incentives should be ideally given to investment and current e¤orts which both impact the second-period pro…t.…”

Section: Introductionmentioning

confidence: 99%

“…The authors investigate the desirability of resetting the stock options upon receiving the signal. 1 We acknowledge that one could also include another possible interaction between current and investment e¤orts: current and investment e¤orts, when exerted in the same period t; both a¤ect the aggregate manager's e¤ort cost in period t in a non-additive way. For simplicity, however, we suppose here that e¤ort costs are additive, thus abstracting from the (cost-side) substitutability or complementary of e¤orts.…”

Section: Introductionmentioning

confidence: 99%

“…They …nd that when the manager's utility function is linear in consumption and e¤ort, it is better for the principal to agree from the outset that she will reset the strike price in the event of receiving the signal L. However, with other functional forms, the authors …nd that either benchmark strategy may dominate the other, depending on speci…c parametrization. Our model and that of Acharya et al (2000) di¤er in a number of respects. First, Acharya et al (2000) focus on the case of a risk-neutral manager, while our model assumes that the manager is risk-averse.…”

Section: Introductionmentioning

confidence: 99%

“…Our model and that of Acharya et al (2000) di¤er in a number of respects. First, Acharya et al (2000) focus on the case of a risk-neutral manager, while our model assumes that the manager is risk-averse.…”

Section: Introductionmentioning

confidence: 99%

“…Second, in the former model, consumption takes place only at the end of period 2 while in our model consumption takes place in both periods. Third, Acharya et al (2000) assume that the legally binding contract prohibits either party to terminate the relationship at the end of period 1, while we allow termination.…”

Section: Introductionmentioning

confidence: 99%

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Disentangling managerial incentives from a dynamic perspective: The role of stock grants

Hili

Laussel

Long

2017

Pacific Economic Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We analyze the optimal contract between a risk-averse manager and the initial shareholders in a two-period model where the manager.s investment effort, carried out in period 1, and her current effort, carried out in period 2, both impact the second-period profit, so that it may be difficult to disentangle the incentives for these two types of effort. The contract stipulates (a) the profitcontingent cash remuneration for each period, (b) the number of shares that will be granted to the manager at the end of the first period and (c) the restrictions (if any) on the sales of the granted stock. We show that stock grants play different roles according to whether the signal of investment effort is less noisy, or noisier, than that of current effort. In the former case, at the optimal solution, the firm gives more incentive to investment effort than to period 2 current effort, and there is no need to restrict the sales of granted stocks: the stock grants then serve as an incentive device for investment effort, and it is efficient to permit the manager to sell all her shares to eliminate her dividend risks. In the latter case, the efficient contract does not allow the manager to sell her granted stock, and both current and investment efforts are given the same incentive. In this case, stock grants play a different role: they serve as commitment device to overcome the time-inconsistency problem. We determine simultaneously the optimal stock grants and the optimal restrictions on sales of shares. JEL-Codes: M510, M520. Terms of use: Documents in

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%