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Stock Options for Undiversified Executives
Brian J. Hall, Kevin J. Murphy
Dec. 18, 2000
Link to a Working Paper available for downloading from the National Bureau of Economic Research. Excerpt: We employ a certainty-equivalence framework to analyze the cost and value of, and pay/performance incentives provided by, non-tradable options held by undiversified, risk-averse executives.... We demonstrate that the divergence between the value and cost of options explains, or provides insight into, virtually every major issue regarding stock option practice ...
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