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| Author: | Meulbroek, L. K. |
| Title: | The efficiency of equity-linked compensation: understanding the full cost of awarding executive stock options |
| Journal: | Financial Management
2001 : SUMMER, VOL. 30:2, p. 5-44 |
| Index terms: | COMPENSATION EFFICIENCY EXECUTIVES STOCK OPTIONS |
| Language: | eng |
| Abstract: | To properly align incentives using equity-linked compensation, the firm's managers must be exposed to firm-specific risks, but this concentrated exposure prevents optimal portfolio diversifications. Because undiversified managers are exposed to the firm's total risk, but rewarded (through expected returns) for only the systematic portion of that risk, managers will value stock or option-based compensation at less than its market value. This paper derives a method to measure this deadweight cost, which empirically can be quite large. |
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