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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26339
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| Title: | Optimal Exercise of Executive Stock Options and Implications for Firm Cost |
| Authors: | Stanton, Richard
Wallace, Nancy
N. Carpenter, Jennifer |
| Issue Date: | 3-Dec-2007 |
| Series/Report no.: | FIN-07-024 |
| Abstract: | Options have become a major component of corporate compensation. Their
cost to arms depends on the exercise policies of executives who face
hedging constraints. This paper analyzes the optimal policy and option
cost for an executive with general concave utility. We show analytically
how the policy and cost vary with risk aversion, wealth, and dividend,
and when there exists a single stock price boundary. We also provide an
example with a split continuation region, and numerical results on
volatility and beta effects. Option value decreases with risk aversion,
increases with wealth and hedging opportunities, but can actually
decline with volatility. |
| URI: | http://hdl.handle.net/2451/26339 |
| Appears in Collections: | Finance Working Papers
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