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A Stock Option Based Incentive Scheme with an Endogenous Strike Price

Author

Listed:
  • Haltia, O.
  • Leppamaki, M.

Abstract

This paper examines the implications of corporate manager's tendency to promote her private benefits by realizing inefficient investments that incurs a cost for shareholders in terms of lost shareholder value. Under reasonable conditions, we derive an expression for such a loss and propose a compensation scheme providing an incentive to avoid inefficent investments. The scheme amends the well-established linear incentive scheme with a call option, the strike price of which is endogenously determined by the scale of corporate investment as well as investment returns in alternative equally risky projects.

Suggested Citation

  • Haltia, O. & Leppamaki, M., 2000. "A Stock Option Based Incentive Scheme with an Endogenous Strike Price," University of Helsinki, Department of Economics 480, Department of Economics.
    • Handle: RePEc:fth:helsec:480
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    More about this item

    Keywords

    PRICES ; CAPITAL ; SHAREHOLDERS;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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