Type of Document	Dissertation
Author	Yang, Tung-Hsiao
Author's Email Address	tyang1@lsu.edu
URN	etd-03302007-004530
Title	Managerial Ability and the Valuation of Executive Stock Options
Degree	Doctor of Philosophy (Ph.D.)
Department	Finance (Business Administration)
Advisory Committee	Advisor Name Title Don Chance Committee Chair Clifford Stephens Committee Member Ji-Chai Lin Committee Member Jimmy Hilliard Committee Member R. Carter Hill Committee Member Junfang Yu Dean's Representative
Keywords	managerial effort expected utility managerial ability executive compensation stock option
Date of Defense	2007-03-22
Availability	unrestricted
Abstract The executive compensation literature argues that executives generally value stock options at less than market value because of suboptimal ownership and risk aversion. Implicit in this finding is the assumption that executives are, like shareholders, price takers. That is, they have no ability to influence the outcomes of the firm’s investments. Clearly, executives do have the ability to influence these outcomes, because that is the purpose of granting them the options. In this paper, we develop a model in which managers can exert effort and alter the distribution of the returns from the firm’s investments. We find that when executives choose their optimal effort, the values of their options are much higher than generally thought and potentially higher than the market values of the options. In empirical evidence, we show that firms having better stock performance use stock options more efficiently. In addition, the pay-for-performance sensitivity is also stronger among these firms. Therefore, we conclude that the manager’s ability plays an important role in the abnormal performance.
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