optimal producer behavior in the presence of area yield crop insurance optimal producer behaviour in the presence of area yield insurance is studied the producer s optimal production and insurance choices are characterized the effect of the provision of area yield insurance on production patterns is studied and sufficient conditions for the provision of area yield insurance to increase the riskiness of the individual producer s decisions are derived a separation result is derived for area yield insurance contracts and stochastic technologies

how to value employee stock options one of the arguments often used against expensing employee stock options is that calculating their fair value at the time they are granted is very difficult this article presents an approach to calculating the value of employee stock options that is practical easy to implement and theoretically sound it explicitly considers the vesting period the possibility that employees will leave the company during the life of the option the inability of employees to trade their options and the relevant dilution issues this approach is an enhancement of the approach suggested by the financial accounting standards board s statement of financial accounting standards no 123 because it does not require an arbitrary reduction in the life of the option to allow for early exercise caused by the inability of employees to trade their options

using auctions to price employee stock options the case of zions bancorporation esoars the first empirical analysis of zions bancorporation s 2006 and 2007 auctions of employee stock option appreciation rights securities esoars this study examined 1 the impact of auction rules on bidding strategies and allocations 2 the efficiency of the auction clearing prices and 3 the value gap between esoars auction clearing prices and various model based estimates it found that the design features of the auctions e g ending rules significantly affected bidding strategies but not final allocations which remained highly concentrated it also found that the clearing prices 1 displayed high price elasticities of demand suggesting efficient price discovery and 2 were low relative to some but not all model based estimates these findings suggest design improvements that might benefit auctions of other illiquid derivatives e g banks troubled assets currently being considered by the u s government

stability of us petroleum refinery response to relative product prices abstract the stability of the response of petrol s share of petroleum product mix to changes in petroleum product prices is investigated in this paper by using the cooley and prescott varying parameter technique on us data a significant response to changes in product prices is found when the price of petrol increased by 1 its share of product mix increased by over 0 08 while increases in residual and distillate fuel oil prices decreased petrol s share this response was found to be stable from 1936 to 1976 with the war years excluded thus the usa with ample cracking and downstream conversion capacity has been able to respond consistently to the variations in product prices although the model proved stable less precise and less elastic estimates when the period 1974 76 was included suggest less consistent responses under conditions of large price changes heavier crude oils increased unleaded petrol production and crude oil shortages

estimating dynamic demand for cigarettes using panel data the effects of bootlegging taxation and advertising reconsidered abstracct a dynamic demand for cigarette consumption is estimated using pooled data of 46 states over the period 1963 to 1980 a price elasticity of 0 2 and an insignificant income elasticity is found using pooled estimation techniques the bootlegging effect is modeled explicitly using neighboring price the effect is found to be significant two major policy issues are analyzed in light of these new estimates 1 cigarette taxation is found to be an effective tool for generating revenues even though there may be spillover effects to neighboring states where bootlegging is significant 2 the effects of the fairness doctrine act and the advertising ban on cigarette consumption are re examined we find mild support for the effectiveness of subsidized anti smoking messages in reducing cigarette consumption and no support for the thesis that the ban on advertising helps to increase per capita consumption

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

production risk in multi output industries estimates from norwegian dairy farms farmers who produce multiple outputs are portfolio managers in the sense that they use inputs to balance expected economic return and variance of return this article estimates the structure of the stochastic multioutput production technology in norwegian dairy farming allowing for a more flexible specification of the technology than previous studies we find that an increase in input levels leads primarily to higher output variability and that inputs also influence the covariance of shocks between outputs risk reducing effects of inputs on outputs are primarily present in the covariance functions technical change leads to shifts in the profit distribution over the data period but no welfare improvement for risk averse farmers

measuring technical and environmental efficiency in a state contingent technology most developed countries support farming activities through policies that are tailored to meet their specific social economic and environmental objectives economic and environmental efficiency have recently become relevant targets of most of these policies whose sound implementation can be enhanced by monitoring farm performance from a multidimensional perspective this paper proposes farm level technical and environmental efficiency measures that recognize the stochastic conditions in which production takes place a state contingent framework is used to model production uncertainty an implementable representation of the technology is developed using data envelopment analysis the application focuses on a sample of catalan arable crop farms results suggest that technical efficiency is slightly lower in bad than in good growing conditions nitrogen pollution can decrease substantially more under good than bad growing conditions

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

the subjective and objective evaluation of incentive stock options owners of incentive options invariably hold undiversified portfolios this paper derives a model for the subjective and objective values of such options the subjective value the value to the holder is less than the market value because the option is held in an undiversified portfolio and because it is exercised suboptimally from the market perspective the objective value is the cost to the firm of issuing the option and lies between the market and subjective values this value recognizes the suboptimal exercise but not the undiversified discount the model which is the black scholes model with modified parameters is simple to use

backdating executive stock options an ex ante valuation abstract when backdating executive stock options esos the exercise price is set in favor of the recipient executive relative to a non backdated benchmark we find an ex ante upper bound for the cost of backdating to shrink from 10 to about 3 7 as a consequence of the regime change represented by the sarbanes oxley act sox we frame the backdating behavior as a compound exotic option considering both simple and extended models of the underlying eso in the latter case we draw on the analytical eso models of sircar and xiong 2007 post sox we use a longstaff schwartz inspired least squares monte carlo approach

non point source pollution regulation as a multi task principal agent problem this paper considers a multi task principal agent problem where risk averse farmers possessing private information have two tasks pollution control and corn production but only direct incentive for corn production using a highly tractable reformulation of the standard uncertain production model a general method for solving the associated constrained paretian problem is developed and analyzed the optimal solution is shown to obey a generalized inverse elasticity rule and the optimal solution is characterized under a number of assumptions about the underlying technology and the role that pollution emission plays in reducing farmer risk

evaluating the environmental efficiency of a two stage system with undesired outputs by a dea approach an interest preference perspective abstract in this study we propose a new dea model to evaluate the environmental efficiency of a two stage system with undesired outputs the two stage system consists of two parts a production subsystem and a pollution treatment subsystem different choices for allocating resources to each subsystem represent different interest preferences of decision makers with the production subsystem corresponding to short term interests and the pollution treatment subsystem corresponding to long term interests based on a proposed new dea model three theorems are established to show the relationships between the interest preference parameter and the change of efficiency scores an empirical analysis was conducted using the data of 30 provinces and municipalities eight regions of china the empirical results show the effectiveness of the proposed model and the usefulness of the theorems for the real world data optimal efficiency rankings of the eight regions are provided and the efficiency rankings truly reflect the current environmental situations of these eight regions to examine the economic impacts and facilitate sustainable development we also analyze the shadow prices for undesired outputs corresponding implications of the empirical analysis are also discussed

too much pay performance sensitivity abstract we examine the relation between pay performance sensitivity pps the convexity of managerial compensation vega and future stock risk and returns for a large sample of firms between 1992 and 2004 higher pps and vega are both associated with lower future stock returns part of this negative relation can be explained by risk averse managers decreasing equity risk in response to increases in pps and vega however even after correcting for lower future risk future stock returns are negatively associated with the magnitude of option sensitivity this finding is consistent with previous studies that link high option compensation to manager owner agency problems

the approach to realizing the potential of emissions reduction in china an implication from data envelopment analysis abstract by proposing a three hierarchy meta frontier data envelopment analysis dea this paper first decomposes co 2 emissions efficiency and the potential for emissions reduction into the following three components structural technical and management based on these components we then conduct an empirical analysis of china s total factor co 2 emissions efficiency its potential for co 2 emissions reduction and its corresponding implementation path the results show that co 2 emissions efficiency in mainland china is relatively low because of structural inefficiency technical inefficiency and management inefficiency the chinese government is expected to realize a large quantity of co 2 emissions reduction potential nearly 40 of the current total co 2 emissions through adjusting the industrial structure narrowing the technology gap among regions promoting the reform of marketization and strengthening environmental regulation the causes of co 2 emissions inefficiency and the distribution of potential reductions in emissions show a distinct spatial difference characteristic therefore this paper also formulates emissions reduction strategies for china s 30 provinces according to their specific situations noting the direction of the industrial structure adjustment and the path to improving co 2 emissions efficiency

estimating state contingent production frontiers chambers and quiggin 2000 use state contingent representations of risky production technologies to establish important theoretical results concerning producer behavior under uncertainty unfortunately perceived problems in the estimation of state contingent models have limited the usefulness of the approach in policy formulation we show that fixed and random effects state contingent production frontiers can be conveniently estimated in a finite mixtures framework an empirical example is provided compared to conventional estimation approaches we find that estimating production frontiers in a state contingent framework produces significantly different estimates of elasticities firm technical efficiencies and other quantities of economic interest

employee stock option valuation with an early exercise boundary many companies are recognizing that the black scholes formula is inappropriate for employee stock options esos and are moving toward lattice models for accounting or decision making purposes in the most influential of these models the assumption is that employees exercise voluntarily when the stock price reaches a fixed multiple of the strike price effectively introducing a horizontal exercise boundary into the lattice in practice however employees make a trade off between intrinsic value captured and the opportunity cost of time value forgone the model proposed here explicitly recognizes and accounts for this reality and is intuitively appealing easily implemented and compliant with u s accounting standards

revisiting the incentive effects of executive stock options abstract we develop a multiperiod framework to evaluate the incentive effects of executive stock options esos for a given increase in the grant date firm stock price and a concurrent increase in return volatility the increment of total value at the vesting date acts as a proxy for the incentive effects of esos if the option is attached to the existing contract without adjusting cash compensation we suggest that a firm should not always fix the strike price to the grant date stock price instead the strike price should vary with the length of the vesting period we also show that compared with at the money options restricted stock generates greater incentives to increase stock prices in some scenarios especially when equity based awards are vested early if the vesting period is long the firm could grant options instead of restricted stock to maximize incentives

stability of canadian refinery response to petroleum product prices the proportion of gasoline in a barrel of crude oil varies in response to changes in relative product prices this response is found to be significant and stable using the cooley prescott varying parameter technique on canadian data for 1956 77 when the price of gasoline increases by 1 its share increases by 0 28 kerosene and gasoline are found to be substitutes in production while gasoline and residual fuel oil are found to be complements the us has a different response function with heavier rather than lighter products as substitutes for gasoline in the production process these variations are attributed to differences in energy product markets and government policies

optimal exercise of executive stock options and implications for firm cost this paper conducts a comprehensive study of the optimal exercise policy for an executive stock option and its implications for option cost average life and alternative valuation concepts the paper is the first to provide analytical results for an executive with general concave utility wealthier or less risk averse executives exercise later and create greater option cost however option cost can decline with volatility we show when there exists a single exercise boundary yet demonstrate the possibility of a split continuation region we also show that for constant relative risk averse utility the option value does not converge to the black and scholes value as the correlation between the stock and the market portfolio converges to one we compare our model s option cost with the modified black and scholes approximation typically used in practice and show that the approximation error can be large or small positive or negative depending on firm characteristics

the sensitivity of consumption of oil products to price changes an econometric investigation abstract this paper presents a small econometric model of the supply and demand of motor spirit diesel fuel oil and other gas diesel oil by modelling at this level of disaggregation it is possible to identify the dynamic structure of each market and estimate own price and cross price elasticities

risk ambiguity and the exercise of employee stock options abstract we investigate the importance of ambiguity or knightian uncertainty in executives stock option exercise decisions we develop an empirical estimate of ambiguity and include it in regression models alongside the traditional measure of risk equity volatility we show that each variable has a significant effect on the timing of option exercises with volatility causing executives to hold options longer to preserve option value and ambiguity increasing the tendency for executives to exercise early

aggregate homothetic separability this paper develops necessary and sufficient conditions for an aggregate sector cost function derived from industry cost functions to exhibit homothetic separability

specification and estimation of production risk risk preferences and technical efficiency this article deals with specification and estimation of risk preferences production risk and technical inefficiency it makes contribution in three separate areas of production economics first we model producers attitude toward risk and derive risk preference functions without assuming any parametric form of the utility function and any distribution of the error term representing production risk when risk arises from production uncertainty and technical inefficiency second the standard production risk model is extended to accommodate technical inefficiency and producers attitude toward risk finally the technical efficiency model is generalized to accommodate production risk and producers attitude toward risk copyright 2002 oxford university press

heteroscedasticity or production risk a synthetic view two veins of literature namely production risk literature and stochastic frontier analysis are examined both fields are concerned of output variation the former due to exogenous shocks the latter due inefficiency by covering the literature from both the fields this review suggests that the concept of heteroscedasticity can be utilized to build a synthesis between these mainly separate branches of literature however the synthetic approach brings a challenge how to differentiate between different sources of output variation this challenge is identified as the main obstacle to meaningfully combine the two approaches

non marketability and the value of employee stock options abstract we adapt the benninga et al 2005 framework to value employee stock options esos the model quantifies non diversification effects is computationally simple and provides an endogenous explanation of eso early exercise using a proprietary dataset of eso exercise events we measure the non marketability eso discount we find that the eso value on the grant date is approximately 45 of a similar plain vanilla black scholes value the model is aligned with empirical findings of esos gives an exercise boundary of esos and can serve as an approximation to the fair value estimation of share based employee and executive compensation using the model we give a numerical measure of non diversification in an imperfect market

is expected utility theory applicable a revealed preference test we proffer a method to assess the adequacy of expected utility theory eut in empirical studies involving discrete and continuous choices the method calibrates a utility function to revealed choices and rejects eut for absurd degrees of implied concavity over the wealth at risk we find eut rejections in cases where risk averse choices are made between gambles with similar stakes regardless of their absolute sizes eut is shown to be applicable only when expected payoffs of gambles are similar or when more than half of wealth is at risk we illustrate our method with an application to agricultural production

the sensitivity of ceo wealth to equity risk an analysis of the magnitude and determinants abstract to control risk related incentive problems equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers wealth i find stock options but not common stockholdings significantly increase the sensitivity of ceos wealth to equity risk cross sectionally this sensitivity is positively related to firms investment opportunities this result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk increasing projects is greatest firms stock return volatility is positively related to the convexity provided to managers suggesting convex incentive schemes influence investing and financing decisions

separation and hedging results with state contingent production a state contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty producer behaviour with both production and price risk in the presence and in the absence of futures and forward markets is analysed in this state contingent framework conditions for the optimal hedge to be positive or negative are derived we also show that under plausible conditions a risk averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a nonstochastic technology new separation results which hold in the presence of both price and production risk are then developed these separation results generalize townsend s spanning results by reducing the number of necessary forward markets by one

a cost approach to economic analysis under state contingent production uncertainty this article explores the economics of input decision under production uncertainty the article develops a methodology to specify and estimate cost minimizing input decisions under a state contingent technology the analysis is applied to time series data on u s agriculture it finds strong empirical evidence that expected output alone does not provide an appropriate representation of production uncertainty the results provide empirical support for an output cubical technology this indicates that an ex post analysis of stochastic technology appears appropriate the analysis also provides evidence that the cost of facing production risk has declined in u s agriculture over the last few decades copyright 2008 oxford university press

managerial responses to incentives control of firm risk derivative pricing implications and outside wealth management a b s t r a c t we model a firm s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options the manager also controls allocation of his outside wealth which allows partially hedging of his exposure to firm risk managerial control increases the expected time to exercise for his employee stock options it also reduces the gap between his certainty equivalent and the firm s fair value for his compensation but that gap remains substantial managerial control also causes traded options to exhibit an implied volatility smile with costly control the same basic patterns remain but the manager s risk taking is dampened

stocking up executive optimism option exercise and share retention abstract we show that an executive is optimistic about her company s prospects if and only if she retains some of the shares received whenever she exercises company stock options empirically an indicator of optimism based on this idea matches the expected relations between optimism and corporate decision making better than commonly used indicators based on the timing of option exercise this makes sense as our model of an executive s optimal option exercise and portfolio choice demonstrates that the timing of option exercise depends just as much on stock and other executive characteristics as it does on optimism

the exercise and valuation of executive stock options abstract in theory hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options because they imply that exercise policies of managers depend on their preferences and endowments using data on option exercises from 40 firms this paper shows that a simple extension of the ordinary american option model which introduces random exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility maximizing model that explicitly accounts for the nontransferability of options the simpler model could therefore be more useful than the preference based model for valuing executive options in practice

does stock return predictability affect eso fair value abstract executive stock options esos are modified american options that cannot be valued using standard methods with a few exceptions the literature has discussed the eso fair value by assuming unpredictable stock returns which are not supported by the available empirical evidence in this paper we obtain the fair value of american esos when stock returns are predictable and specifically driven by the trending ornstein uhlenbeck process of lo and wang 1995 we solve the executive s portfolio allocation problem for a simple buy and hold strategy when his wealth can be distributed between a risk free asset and a market portfolio this problem is jointly solved with the executive s optimal exercise policy we find that executives tend to wait longer the higher the predictability independently of the composition of executive s asset menu we have also analyzed the implications under the fas123r proposals for the eso fair value and found that even for low autocorrelations there is a meaningful mispricing when unpredictable returns are erroneously assumed

structural models and endogeneity in corporate finance the link between managerial ownership and corporate performance this paper presents a parsimonious structural model that isolates primary economic determinants of the level and dispersion of managerial ownership firm scale and performance and the empirical associations among them in particular variation across firms and through time of estimated productivity parameters for physical assets and managerial input and corresponding variation in optimal compensation contract and firm size combine to deliver the well known hump shaped relation between tobin s q and managerial ownership to assess the effectiveness of standard econometric approaches to the endogeneity problem we apply those remedies to panel data generated from the model the unfortunate conclusion is that at least in the ownership performance context proxy variables fixed effects and instrumental variables do not generally provide reliable solutions to simultaneity bias

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

pricing executive stock options under employment shocks abstract we obtain explicit expressions for the subjective objective and market value of perpetual executive stock options esos under exogenous employment shocks driven by an independent poisson process previously we obtain the executive s optimal exercise policy from the subjective valuation that is necessary for the objective one or fair value the perpetual eso is compared with the true finite maturity eso finding that the approximation is reasonably good to illustrate the usefulness of the objective valuation for accounting purposes we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity finally the role of esos in the design of executives incentives is also discussed

moving closer to the action examining compensation design effects on firm risk we examine the influence of ceo equity based compensation on strategic risk taking by the firm building off the behavioral agency model agency theory and prospect theory we develop arguments about when equity based compensation elements will increase or decrease executive risk propensity and in turn strategic risk taking incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of ceo pay will influence risk selection as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences in general this study provides evidence that ceo equity based compensation significantly influences strategic risk but that this influence is more nuanced and complex than conventional treatments of executive compensation assume in particular we find that different forms of equity based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change second we find that cash based forms of pay moderate the incentive properties of equity based pay indicating that cash based pay may affect how executives perceive risks associated with equity pay finally we find that stock price volatility and board actions each also moderate the incentive effects of equity based pay in sum our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of ceo compensation

stock option grants to target ceos during private merger negotiations abstract unscheduled stock options to target chief executive officers ceos are a nontrivial phenomenon during private merger negotiations in 920 acquisition bids during 1999 2007 over 13 of targets grant them these options substitute for golden parachutes and compensate target ceos for the benefits they forfeit because of the merger targets granting unscheduled options are more likely to be acquired but they earn lower premiums consequently deal value drops by 62 for every dollar target ceos receive from unscheduled options conversely acquirers of targets offering these awards experience higher returns therefore deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders

valuing social sustainability in agriculture an approach based on social outputs shadow prices abstract interest in sustainability has gained ground among practitioners academics and policy makers due to growing stakeholders awareness of environmental and social concerns this is particularly true for agriculture however relatively little research has been conducted on the quantification of social sustainability and the contribution of social issues to the agricultural production efficiency this paper proposes a framework based on state contingent outputs to compute shadow prices of social outputs our methodological approach is based on the directional distance function and illustrated using a farm level dataset from a sample of catalan arable crop farms in 2015 our results indicate that in the sample of 180 farms included in the analysis efficiency scores are relatively high for the three alternative states of the nature considered in our state contingent analysis in addition our findings show that social outputs shadow prices are positive indicating that producing more social outputs is considered as great value to the farm for the efficient farms the social outputs shadow prices are contingent upon on the state of nature in a way that social outputs shadow prices increase with the improvement in crop growth conditions these results have implications in terms of eu farm payment redistribution

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

uncertainty avoidance and the timing of employee stock option exercise we examine the impact of the cultural norm of uncertainty avoidance on employee stock option eso exercise behavior using proprietary data from a multinational firm we find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier these findings lend support to a maintained assumption in the eso literature that employee attitudes toward uncertainty influence stock option exercise behaviors our findings further help to explain prior findings of cross cultural differences in firms compensation practices by indicating that employee responses to option based pay and firms consequent financial reporting costs vary as functions of employee uncertainty avoidance

smallholder technical efficiency controlling for environmental production conditions abstract smallholder agricultural production depends heavily on environmental production conditions that are largely exogenously determined yet few data sets collect necessary detailed information on environmental production conditions this oversight raises the spectre of likely omitted variables bias because farmers input choices typically respond in part to environmental conditions moreover because environmental production conditions are rarely symmetrically distributed the omission also generally leads to upward bias in estimated technical inefficiency and to biased estimates of the correlates of estimated technical inefficiency as well using panel data from 464 traditional rice plots in cote d ivoire we show that controlling for heterogeneous environmental production conditions significantly changes inferences perhaps especially with respect to smallholder rice farmers estimated technical inefficiency

the stability of cigarette demand the relative effects of various governmental interventions upon cigarette consumption is important to policy makers historically the demand for cigarettes has been quite unstable previous studie

what happens when you tax the rich evidence from executive compensation this paper examines the responsiveness of taxable income to changes in marginal tax rates using detailed compensation data on several thousand corporate executives from 1991 to 1995 the data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income indeed this small group of executives may account for as much as 20 percent of the aggregate change in wage and salary income for approximately the one million richest taxpayers over this time period one person alone can account for more than 2 percent the decline however is almost entirely a short run shift in the timing of compensation rather than a permanent reduction in taxable income the short run elasticity of taxable income with respect to the net of tax share exceeds one in this sample but the elasticity after one year is at most 0 4 and probably closer to zero breaking out the tax responsiveness of different types of compensation shows that the large short run responses come almost entirely from a large inc

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

private information in executive stock option trades evidence of insider trading in the uk uk executives stock option exercises and associated sell decisions are motivated by private inside information executives use their inside information to lock in short term gains and to sell stock acquired prior to negative abnormal stock returns this informed trading is robust to the alternative factors that might motivate the exercise of executive stock options including option moneyness and value of exercise we suggest that the disparity in informed trading between us and uk executives option trades is related to important differences in the proportion of executive remuneration linked to options the regulation of options and the taxation of option gains

probability weighting and employee stock options this paper documents that riskier firms with higher idiosyncratic volatility grant more stock options to nonexecutive employees standard models in the literature cannot easily explain this pattern a model in which a risk neutral firm and an employee with prospect theory preferences bargain over the employee s pay package can the key feature which makes stock options attractive is probability weighting the model fits the data on option grants well when calibrated using standard parameters from the experimental literature the results are the first evidence that risky firms can profitably use stock options to cater to an employee demand for long shot bets

risk aversion and block exercise of executive stock options abstract it is well documented that executives granted stock options tend to exercise early and in a few large transactions or blocks standard risk neutral valuation models cannot explain these patterns and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option this paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options we show that utility based models do not predict block exercise behavior rather the risk averse executive exercises stock options individually at a sequence of increasing price thresholds when in addition the executive faces frictions such as costly exercise he faces a trade off between exercising little and often to maximize return and exercising larger quantities on fewer occasions to minimize effort this generates realistic block exercise behavior and yields new predictions in particular executives should begin by exercising large blocks of options but the block sizes should become smaller over time our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company we find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior

the state contingent properties of stochastic production functions this paper develops the state contingent properties of the most frequently used representations of stochastic production in the agricultural economics literature particular attention is paid to the cases of multiplicative and additive uncertainty and to the convolution of multiplicative and additive uncertainty embodied in the just pope stochastic production function state contingent technologies and their associated cost functions are reviewed and that theory is applied to the stochastic production function a generalisation of the just pope technology that has desirable state contingent characteristics is proposed cost functions based upon state contingent technologies are compared with cost functions based on a parametrised distribution representation of production uncertainty

does option compensation increase managerial risk appetite 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 managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

managerial optimism and earnings smoothing abstract this paper empirically examines how ceo optimism affects earnings smoothing and earnings surprises the main finding is that optimistic managers smooth earnings more than rational managers and are associated with smaller in absolute value earnings surprises a possible theoretical explanation is offered for these results based on a combination of the torpedo effect the innate behavior of optimists and the risk of litigation prosecution for over reporting earnings

the measurement and sources of technical inefficiency in the indonesian weaving industry production function models are estimated with a time series of cross section data on indonesian weaving establishments the sources of technical inefficiency are investigated three firm attributes are identified as being potentially related to firm efhciency tbey are firm ownership age and size the importance of these attributes as sources of inefficiency in the indonesian weaving industry is investigated and the implications of the find ings discussed

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

do stock options overcome managerial risk aversion evidence from exercises of executive stock options we report that the probability that executives exercise options early decreases with the volatility of the underlying stock return we interpret this to mean that executives subjective option value increases with volatility and that option grants increase executives risk appetite further decomposition reveals that the results are most pronounced for idiosyncratic volatility consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty and thus favor the former data are available at http dx doi org 10 1287 mnsc 2016 2495 this paper was accepted by wei jiang finance

advertising in consumer goods industries durability economies of scale and heterogeneity hree prominent explanations can be offered for the large and persistent recorded profit rates of firms in heavily advertised consumer goods industries these explanations are based on durability scale economies and heterogeneity for advertising respectively the first explanation posits a prolonged durability for advertising as a consequence recorded profit rates are overstated because accounting convention expenses advertising rather than properly treating it as an investment in durable assets 2 when the durability of advertising is sufficiently prolonged normal returns on the unreported advertising assets fully account for apparent windfall profits a second explanation rests on the presumed collusion

ceo stock based compensation an empirical analysis of incentive intensity relative mix and economic determinants the use of stock based compensation for u s ceos has increased significantly throughout the 1990s research interest in particular on stock option compensation has similarly increased yet contradictory results create questions about the theoretical underpinnings therefore we revisit the controversy surrounding stock option awards and we further the understanding of restricted stock grants which have escaped similar research focus using a recent data set we obtain convincing empirical support for most theoretical predictions about stock option awards we also find that restricted stock due to its linear payoffs is relatively inefficient in inducing risk averse ceos to accept risky value increasing investment projects copyright 2000 by university of chicago press