Executive stock options when managers are loss-averse


Dittmann, Ingolf ; Maug, Ernst ; Spalt, Oliver



URL: http://citeseerx.ist.psu.edu/viewdoc/download?doi=...
Additional URL: https://www.researchgate.net/publication/23753381_...
Document Type: Working paper
Year of publication: 2006
Place of publication: Mannheim
Publication language: English
Institution: Business School > ABWL, Finanzwirtschaft u. Finanzmarktinstitutionen (Spalt 2019-)
Business School > ABWL u. Corporate Finance (Maug)
Subject: 330 Economics
Abstract: This paper analyzes optimal executive compensation contracts when managers are loss averse. We show that optimal contracts consist of an upward sloping compensation function and a threshold value for the value of the firm below which the manager is fired and suffers a discrete loss of compensation. We parameterize the model using data on compensation contracts and parameters for preferences suggested by the experimental literature. For a representative CEO, we estimate the optimal contract predicted by the model and discuss its comparative static properties. It turns out that the model’s predictions are remarkably accurate and that it can explain the use of stock options as part of an optimal contract. The approximation is about one order of magnitude better than those from reasonable parameterizations of the conventional principal agent model with constant relative risk aversion.

Dieser Eintrag ist Teil der Universitätsbibliographie.




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