Optimal Contracting, Incentive Effects and the Valuation of Executive Stock Options

2001 ◽  
Author(s):  
Yisong S. Tian
Keyword(s):  
Stock Options ◽  
Executive Stock Options ◽  
Incentive Effects ◽  
Optimal Contracting

scholarly journals Executive stock options: Preliminary Australian evidence of shareholder wealth effects of pre-effort contracting

2005 ◽  
Vol 2 (3) ◽  
pp. 94-105
Author(s):  
Jean M. Canil ◽  
Bruce A. Rosser
Keyword(s):  
Stock Options ◽  
Shareholder Wealth ◽  
Wealth Effects ◽  
Executive Stock Options ◽  
Shareholder Returns ◽  
Incentive Effects ◽  
Disincentive Effect

We document a structure of pre-effort conditions associated with ESOPs. Since we can observe shareholder returns at award we infer incentive effects in a setting where premium and discounted executive stock options are regularly awarded. Discounted (premium) awards are associated with the highest (lowest) exercise rates, implying a successful incentive (disincentive) effect. Exercise restrictions (comprising hurdles and vesting restrictions) necessarily lower exercise rates, but may be preferred in combination with a discounted or premium award. Typically, a discount choice is associated with hurdles but not vesting restrictions. Empirically, shareholders benefit most from regular awards which are discounted and do not have hurdle price restrictions. Shareholders also benefit from hurdle provisions in irregular awards which may expose shareholders to CEO opportunism.

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