Jackwerth, Jens Carsten and Hodder, James E. (2008): Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management.
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We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage gap between his certainty equivalent and the firm’s fair value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile.
|Item Type:||MPRA Paper|
|Original Title:||Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management|
|English Title:||Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management|
|Keywords:||Risk; Wealth Management; Derivative|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
|Depositing User:||Jens Jackwerth|
|Date Deposited:||19. Nov 2008 06:48|
|Last Modified:||13. Feb 2013 04:56|
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