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Wendy Wu
Optimal Executive Compensation: Stock Options or Restricted Stocks
Yan Wendy Wu
published: 2011 | Research publication | Research publication
"Optimal Executive Compensation: Stock Options or Restricted Stocks." Forthcoming at International Review of Economics & Finance
Abstract: This paper develops an agency model to analyze the optimality of executive stock option compensation in the presence of information manipulation. The analyses show that although information manipulation is positively related to the size of option compensation, the relative size of manipulation-to-effort does not depend on the size of option compensation. Furthermore, an optimal executive compensation package includes stock options instead of restricted stocks under most circumstances. Testable predictions on the relationship between optimal option exercise price and exogenous model parameters are derived.
revised Feb 1/11
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