Study Of Executive Stock Options

In western industries, executive option salary system has taken place of the traditional salary system of basic salary plus annul bonus. As a solution of the problem of long term incentive system of "Trust - Agency" contradiction, reward and risk symmetry, executive option system becomes more and more concerned about by the investors, economists and financial experts.In China, for quite a long time, the reward of the manager is independent of the firm's revenue. The interest of the manager can not be protected, which sharps the contradiction of "Trust-Agency", harms share-holder's interest. And, the firm lost the internal power of development Now, to set up a complete inspiration system is an important step to the firm's reformation in China. In this paper, we make some research on the economic foundations of executive option, how to evaluate it and the incentive effect of the executive option underdifferent pricing models.This paper is organized as following, In Chapter 1, we start with the concept, properties and elements of executiveoption and then the status quo in U.S.A and China.Chapter 2 deals with the economic foundations of executive option. First, we review the two primary Agency Theories, i.e. "Empirical Agency Theory" and "Trust-Agency Theory". Next, we analyze the economic foundations of executive option with Empirical Agency Theory. Under reasonable assumption, executive option system can eliminate the outside share-holder's agency cost (and the agency cost relevant to non-cash earnings). Finally, with Trust-Agency Theory, we make further description of the economic foundations of executive option. First we introduce two concept, expected utility and risk altitude, which are often used in theoretic analysis. Then, we set up a "Trust-Agency model" ("parameterized method of distribution function'). With conditional one-order method, we give out an integrity expression of inspirit contract, in which stock price is the observed value. We prove that when a manager has a decreasing absolute risk aversion and stable or increasing relative risk averseness degree,the optimal inspirit contract is convex on some observed value of stock price and stock price behavior also has some influence on the convexity of the optimal inspirit contract We find that when the manager's utility function is a power function and the relative risk averseness is 0.5, the optimal inspirit contract is composed by three parts: a fix earnings part, a part linear relevant to stock price and a incentive part whose earnings is the increasing convex function of stock price. In theory, there are some convex incentive methods. How ever, empirical study finds that executive option is the method which satisfies convex property of the optimal incentive contract. In the study of executive option with Trust-Agency theory, we also find out that different type company has different degree of demand for executive option, and set up the reasonable standard to decide which kind of company needs executive option.Chapter 3 deals with the evaluation of executive option. First, we discuss the value of executive option from share-holder and manager's point of view and point out the important difference. Simultaneously, we study two evaluation methods on share-holder's side: irrelevant method and relevant method. We also make some research on manager's utility method and definite equivalence method on manager's side. And, finally is the evaluation of two non-standard executive options. (Reset executive option and index executive option)Chapter 4 deals with the incentive effect of executive option. First, we discuss the incentive effect of executive option pricing model from share-holder's point of view and list the index of incentive effect evaluation. From that we find that executive option has stock price increase incentive effect, risk increase incentive effect and bonus rate decrease incentive effect. We also make the comparative analysis of the incentive effects of standard executive option and non-standard executive option...