TY  - JOUR
AU  - Hall,Brian J.
AU  - Murphy,Kevin J.
TI  - Stock Options for Undiversified Executives
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8052
PY  - 2000
Y2  - December 2000
UR  - http://www.nber.org/papers/w8052
L1  - http://www.nber.org/papers/w8052.pdf
N1  - Author contact info:
Brian Hall
Harvard Business School
Baker Library 185
Boston, MA  02163
Tel: 617/495-5062
Fax: 617/496-7379
E-Mail: bhall@hbs.edu

Kevin J. Murphy
Marshall School of Business
University of Southern California
HOH 600D, Mail Code 1421
Los Angeles, CA  90089
Tel: 213-740-6553
Fax: 213-740-6650
E-Mail: kevin.murphy@marshall.usc.edu
M2  - featured in NBER digest on 2001-05-01
AB  - We employ a certainty-equivalence framework to analyze the cost and value of, and pay/performance incentives provided by, non-tradable options held by undiversified, risk-averse executives. We derive  Executive Value' lines, the risk-adjusted analogues to Black-Scholes lines, and distinguish between  executive value' and  company cost.' We demonstrate that the divergence between the value and cost of options explains, or provides insight into, virtually every major issue regarding stock option practice including: executive views about Black-Scholes measures of options; tradeoffs between options, stock and cash; exercise price policies; connections between the pay-setting process and exercise price policies; institutional investor views regarding options and restricted stock; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.
ER  -