Stocks or options? Moral hazard, firm viability, and the design of compensation contracts

Ohad Kadan, Jeroen M. Swinkels*

*Corresponding author for this work

Research output: Contribution to journalArticle

37 Scopus citations

Abstract

We consider the choice between stocks and options to provide effort incentives to a riskaverse manager. We show that stocks can dominate options as a means of motivation only if nonviability risk is substantial, as in financially distressed firms or start-ups. Options dominate stocks for other firms. These results hold regardless of the existing portfolio of the manager. We provide empirical evidence that higher bankruptcy risk is indeed correlated with more use of stock.

Original languageEnglish (US)
Pages (from-to)451-482
Number of pages32
JournalReview of Financial Studies
Volume21
Issue number1
DOIs
StatePublished - Jan 1 2008

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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