Title page for ETD etd-03302007-004530


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 firmís 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 firmís 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 managerís ability plays an important role in the abnormal performance.
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