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

Ohad Kadan; Jeroen M. Swinkels

doi:10.1093/rfs/hhm077

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

Ohad Kadan, Jeroen M. Swinkels^*

^*Corresponding author for this work

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48 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 language	English (US)
Pages (from-to)	451-482
Number of pages	32
Journal	Review of Financial Studies
Volume	21
Issue number	1
DOIs	https://doi.org/10.1093/rfs/hhm077
State	Published - Jan 2008

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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10.1093/rfs/hhm077

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

Abstract

ASJC Scopus subject areas

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