Estimating the Cost of Executive Stock Options: Evidence from Switzerland

Drobetz, Wolfgang and Pensa, Pascal and Schmid, Markus M.. (2007) Estimating the Cost of Executive Stock Options: Evidence from Switzerland. WWZ Discussion Papers, 2007 (17).

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Official URL: https://edoc.unibas.ch/61235/

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It is often argued that Black-Scholes (1973) values overstate the subjective NEWLINE value of stock options granted to risk-averse and under-diversified executives. NEWLINE We construct a “representative” Swiss executive and extend the certainty- NEWLINE equivalence approach presented by Hall and Murphy (2002) to assess NEWLINE the value-cost wedge of executive stock options. Even with low coefficients NEWLINE of relative risk aversion, the discount can be above 50% compared to the NEWLINE Black-Scholes values. Regression analysis reveals that the equilibrium level NEWLINE of executive compensation is explained by economic determinant variables NEWLINE such as firm size and growth opportunities, whereas the managers’ pay-forperformance NEWLINE sensitivity remains largely unexplained. Firms with larger NEWLINE boards of directors pay higher wages, indicating potentially unresolved NEWLINE agency conflicts. We reject the hypothesis that cross-sectional differences in NEWLINE the amount of executive pay vanish when risk-adjusted values are used as NEWLINE the dependent variable.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > WWZ Forum
12 Special Collections > WWZ Publications > WWZ Discussion Papers and Working Papers
UniBasel Contributors:Schmid, Markus
Item Type:Working Paper
Publisher:WWZ, University of Basel
Number of Pages:33
Note:Publication type according to Uni Basel Research Database: Discussion paper / Internet publication
Identification Number:
  • handle: RePEc:bsl:wpaper:2007/17
edoc DOI:
Last Modified:09 Mar 2018 10:53
Deposited On:07 Mar 2018 11:13

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