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Does Option Compensation Increase Managerial Risk Appetite?

Jennifer N. Carpenter
The Journal of Finance
Vol. 55, No. 5 (Oct., 2000), pp. 2311-2331
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/222491
Page Count: 21
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Does Option Compensation Increase Managerial Risk Appetite?
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Abstract

This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager's optimal policy, the option ends up either deep in or deep out of the money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk seeking. Sometimes, the manager's optimal volatility is less with the option than it would be if he were trading his own account. Furthermore, giving the manager more options causes him to reduce volatility.

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