English, Article, Journal or magazine article edition: Principal Agent Problems Under Loss Aversion: An Application to Executive Stock Options David De Meza; David C Webb

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Bookmark: http://trove.nla.gov.au/version/45231
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Principal Agent Problems Under Loss Aversion: An Application to Executive Stock Options
Author
  • David De Meza
  • David C Webb
Physical Description
  • preprint
Notes
  • Executive stock options reward success but do not penalise failure. In contrast, the standard principalagent model implies that pay is normally monotonically increasing in performance. This paper shows that, under loss aversion, the use of carrots but not sticks is a feature of an optimal compensation contract. Low risk aversion and high loss aversion is particularly propitious to the use of options. Moreover, loss aversion on the part of executives explains the award of at the money options rather than discounted stock or bonus related pay. Other features of stock option grants are also explained, such as resetting or reloading with an exercise price equal to the current stock price.
  • RePEc:fmg:fmgdps:dp478
Language
  • English
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