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Maturity and exercise price of executive stock options

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  • Choe, Chongwoo

Abstract

Using a simple three‐period model in which a manager can gather information before making an investment decision, this paper studies optimal contracts with various stock options. In particular, we show how the exercise price of executive stock options is related to a base salary, the size of the option grant, leverage, and the riskiness of a desired investment policy. The optimal exercise price increases in the size of grant and the base salary and decreases in leverage and the riskiness of a desired investment policy. Other things equal, the optimal exercise price of European options with a longer maturity should increase more for an increase in the base salary and the size of grant and decrease more for an increase in leverage than the one with a shorter maturity. The optimal exercise price of American options is determined by the optimal exercise prices of European options with different maturities. Given the fixed exercise price, the size of the option grant does not decrease in the face value of debt.
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  • Choe, Chongwoo, 2001. "Maturity and exercise price of executive stock options," Review of Financial Economics, Elsevier, vol. 10(3), pages 227-250.
    • Handle: RePEc:eee:revfin:v:10:y:2001:i:3:p:227-250
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    Cited by:

    1. Chongwoo Choe & Xiangkang Yin, 2006. "Should Executive Stock Options Be Abandoned?," Australian Journal of Management, Australian School of Business, vol. 31(2), pages 163-179, December.
    2. Denis, Diane K., 2001. "Twenty-five years of corporate governance research ... and counting," Review of Financial Economics, Elsevier, vol. 10(3), pages 191-212.
    3. Chongwoo Choe, 2006. "Optimal CEO Compensation: Some Equivalence Results," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 171-201, January.
    4. Diane K Denis, 2001. "Twenty‐five years of corporate governance research … and counting," Review of Financial Economics, John Wiley & Sons, vol. 10(3), pages 191-212.

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