Optimal Exercise Prices For Executive Stock Options

By Brian J. Hall, Kevin J. Murphy. 2000

369 citations recorded by the source corpus.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/50bb12800b21fc04cb5817b93ddb30e0c5e59d5f

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Citations in the corpus

CEO Overconfidence and Corporate Investment (2005, positive): “Because of this under-diversification, risk-averse CEOs should exercise their options early given a sufficiently high stock price (Lambert, Larcker, and Verrecchia (1991); Meulbroek (2001); Hall and Murphy (2000, 2002)).”
Stock Options for Undiversified Executives (2002, background): “In Hall and Murphy (2000), we show that, for a wide range of parameters (including different Black-Scholes costs of the option grant), setting exercise prices at (or near) the grant-date market price maximizes pay/performance incentives for risk-averse, undiversified executives.”
Investment, Consumption, and Hedging Under Incomplete Markets (2007, neutral): “…volatility lowers the certainty-equivalent wealth and consumption because of the 4See Carpenter (1998), Detemple and Sundaresan (1999), Hall and Murphy (2000), and Kahl, Liu, and Longstaff (2003), among others, on nontraded asset valuation such as employee stock options; see Section 2…”
Peer Firms in Relative Performance Evaluation (2009, positive): “16The Black and Scholes value of stock option grants can overestimate the option value for undiversified, risk-averse executives (Hall and Murphy, 2000, 2002; Core and Guay, 2003).”
Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts (2008, neutral): “Hall and Murphy (2000, 2002) use this framework to derive optimal exercise prices for stock options, and to analyze the cost, value, and pay-performance sensitivity of nontradable options held by executives.”
Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating (2012, background): “BD refers to the practice of selecting as the option grant date a past date when the stock price was particularly low, which, because options are usually granted at-the-money, results in a low exercise price (Hall and Murphy, 2000; Heron and Lie, 2007).”
Role of Managerial Incentives and Discretion in Hedge Fund Performance (2009, background): “However, only 6% of the options granted to CEOs are out of the money (Hall and Murphy (2000)).”
Leverage decision and manager compensation with choice of effort and volatility (2004, background): “The magnifying effect of leverage on incentives found by Hall and Murphy (2000, 2002) is not enough for low-type managers to overcome their risk-aversion.”
The Impact of the Options Backdating Scandal on Shareholders (2009, background): “Yet, as Hall and Murphy (2000) point out, firms’ tendency to avoid granting in-the-money options has its roots in the 1980’s, long before tax considerations became a relevant concern.”
Executive stock options and IPO underpricing (2007, background): “For example, 94 percent of option grants to S&P 500 CEOs in 1998 were at-the-money grants, despite the fact that in-the-money options would be optimal in many situations (Hall and Murphy (2000, 2002)). Several explanations for this widespread practice have been offered in the literature. First, opti”