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Maturity and exercise price of executive stock options
Author(s) -
Choe Chongwoo
Publication year - 2001
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/s1058-3300(01)00034-9
Subject(s) - salary , economics , leverage (statistics) , stock (firearms) , maturity (psychological) , stock price , debt , non qualified stock option , monetary economics , restricted stock , financial economics , finance , stock market , mathematics , mechanical engineering , psychology , paleontology , developmental psychology , statistics , horse , series (stratigraphy) , engineering , market economy , biology
Using a simple three‐period model in which a manager can gather information before making an investment decision, this paper studies optimal contracts with various stock options. In particular, we show how the exercise price of executive stock options is related to a base salary, the size of the option grant, leverage, and the riskiness of a desired investment policy. The optimal exercise price increases in the size of grant and the base salary and decreases in leverage and the riskiness of a desired investment policy. Other things equal, the optimal exercise price of European options with a longer maturity should increase more for an increase in the base salary and the size of grant and decrease more for an increase in leverage than the one with a shorter maturity. The optimal exercise price of American options is determined by the optimal exercise prices of European options with different maturities. Given the fixed exercise price, the size of the option grant does not decrease in the face value of debt.