The effect of major stock downturns on executive stock option contracts
department or school: Business, Sauder School of
department or school: Accounting, Division of
data provider: DSpace
degree campus: UBCV
creator: Saly, Jane P.
issued: 2011-02-17T21:57:12Z
issued: 1991
related degree: Doctor of Philosophy - PhD
degree grantor: University of British Columbia
description: This dissertation analyzes the effect of a stock market downturn on executive compensation plans which include stock option contracts. A model is developed to determine sufficient conditions for which the optimal compensation contract exhibits characteristics of a fixed salary plus stock option. If a publicly known shift in the distribution of firm value occurs after contracting and before the agent takes his action, then it can be shown to be in the principal's interest to renegotiate the agent's contract. The resulting contract is again a fixed salary plus stock options with lower exercise prices than in the original contract. It is assumed that the shift in the distribution of firm value is a low probability event that is not contracted upon. To determine whether or not it is optimal to contract on a low probability event the set of original contract and rengotiated contract is compared to a contract that is complete with respect to the event. Benefits to complete contracting exist if the agent commits to stay after information about the event becomes available. However, if the agent can leave at any time, the principal may prefer, initially, not to contract on low probability events and simply renegotiate the contract if a low probability event occurs. Renegotiation can take the form of lowering the exercise price of outstanding stock options or adding a layer of options with a lower exercise price than existing outstanding options. Nonparametric tests on stock option grants in 1985 through 1988 indicate that the size of grants in 1987 and 1988 is significantly larger than in 1985 and 1986. These results support the prediction that stock options outstanding in 1987 were renegotiated following the stock crash in October 1987.
aggregated CHO: https://circle.library.ubc.ca/rest/handle/2429/31464
note: T H E E F F E C T OF MAJOR STOCK DOWNTURNS ON E X E C U T I V E STOCK OPTION C O N T R A C T S By P. Jane Saly B. Sc. (Mathematics) Queen's University MBA University of Alberta A THESIS S U B M I T T E D IN PART IAL F U L F I L L M E N T O F T H E R E Q U I R E M E N T S F O R T H E D E G R E E O F D O C T O R OF P H I L O S O P H Y in T H E F A C U L T Y OF G R A D U A T E STUDIES A C C O U N T I N G F a c u l t y of Commerce & Business A d m i n i s t r a t i o n We accept this thesis as conforming to the required standard T H E UN IVERS ITY OF BRITISH C O L U M B I A June 1991 © P. Jane Saly, 1991 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of The University of British Columbia Vancouver, Canada DE-6 (2/88) A B S T R A C T This dissertation analyzes the effect of a stock market downturn on executive compen-sation plans which include stock option contracts. A model is developed to determine sufficient conditions for which the optimal compensation contract exhibits characteris-tics of a fixed salary plus stock option. If a publicly known shift in the distribution of firm value occurs after contracting and before the agent takes his action, then it can be shown to be in the principal's interest to renegotiate the agent's contract. The resulting contract is again a fixed salary plus stock options with lower exercise prices than in the original contract. It is assumed that the shift in the distribution of firm value is a low probability event that is not contracted upon. To determine whether or not…
has type: Thesis/Dissertation
is shown at: 10.14288/1.0100711
language: eng
degree discipline: Business Administration - Accounting
provider: Vancouver : University of British Columbia Library
publisher: University of British Columbia
rights: For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.
scholar level: Graduate
type: Text
identifier URI: http://hdl.handle.net/2429/31464