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dc.contributor.authorBahaji, Hamza
dc.date.accessioned2012-09-18T14:00:18Z
dc.date.available2012-09-18T14:00:18Z
dc.date.issued2011
dc.identifier.urihttps://basepub.dauphine.fr/handle/123456789/10046
dc.language.isoenen
dc.subjectCumulative Prospect Theoryen
dc.subjectIncentivesen
dc.subjectStock optionsen
dc.subjectSubjective value
dc.subject.ddc332en
dc.subject.classificationjelM12en
dc.subject.classificationjelG32en
dc.subject.classificationjelG13en
dc.subject.classificationjelJ44en
dc.subject.classificationjelJ33en
dc.titleIncentives from stock option grants: a behavioral approachen
dc.typeCommunication / Conférence
dc.description.abstractenThis paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a representative employee. Consistent with a growing body of empirical and experimental studies, the model predicts that the employee may overestimate the value of his options in-excess of their risk-neutral value. This is nevertheless in stark contrast with a common finding of standard models based on the Expected Utility Theory (EUT) framework that options value to a risk-averse undiversified employee is strictly lower than the value to risk-neutral outside investors. In particular, I proved that loss aversion and probability weighting have countervailing effects on the option subjective value. In addition, for typical setting of preferences parameters around the experimental estimates, and assuming the company is allowed to adjust existing compensation when making new stock option grants, the model predicts that incentives are maximized for strike prices set around the stock price at inception. This finding is consistent with companies’ actual compensation practices that standard EUT-based models have difficulties accommodating their existence. The paper also examines the relationship between risk taking incentives and stock options and finds that an executive who is subject to probability weighting may be more prompted than a risk-neutral executive to act in order to increase the firm’s assets volatility.en
dc.identifier.citationpages31 pagesen
dc.identifier.urlsitehttp://halshs.archives-ouvertes.fr/halshs-00681611en
dc.subject.ddclabelEconomie financièreen
dc.relation.conftitle6th international finance conference IFC6en
dc.relation.confdate2011-03
dc.relation.confcityHammameten
dc.relation.confcountryTunisieen
dc.relation.forthcomingnonen


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