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Does Option Compensation Increase Managerial Risk Appetite?

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  • Jennifer Carpenter

Abstract

This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager's optimal policy, the option ends up either deep in or deep out of money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk-seeking. Sometimes, the manager's optimal volatility is less with the option than it would be if he were trading his own account. Furthermore, giving the manager more options causes him to reduce volatility.

Suggested Citation

  • Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:99-076
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99076.pdf
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