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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26138
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| Title: | Stock Grants as a Committment Device |
| Authors: | Clementi, Gian Luca
Cooley, Thomas
Wang, Chen |
| Keywords: | Moral Hazard
Optimal Contracts
CEO Compensation
Stock Grants |
| Issue Date: | 20-Mar-2003 |
| Series/Report no.: | EC-04-24 |
| Abstract: | A large and increasing fraction of the value of executives’
compensation is accounted for by security grants. It is often argued
that the optimal compensation contracts characterized in the theoretical
literature can be implemented by means of stock or option grants.
However, in most cases the optimal allocation can be implemented simply
by a contingent sequence of cash payments. Security awards are
redundant. In this paper we develop a dynamic model of managerial
compensation where neither the firm nor the manager can commit to
long-term contracts. We show that, in this environment, if stock grants
are not used, then the optimal contract collapses to a series of short
term contracts. When stock grants are used, however, nonlinear
intertemporal schemes can be implemented to achieve better risk-sharing
and greater firm value. |
| URI: | http://hdl.handle.net/2451/26138 |
| Appears in Collections: | Economics Working Papers
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