Incentive Mechanism, Incentive Effect And Performance Of Stock Option Contracts

In this paper we are concerned with stock option contracts in the provision of managerial incentives. How does the incentive mechanism of stock option contracts realize? What is the difference between the value of stock option accepted by executive and the cost of stock option granted by the shareholders? What are the factors affecting the incentive effect of stock option contracts? What are the factors affecting the performance of stock option contracts? What requirements should the optimal stock option contract meet? Which variables should be considered when deciding optimal stock option contract? How do these variables work? These issues will be of great help to understand stock option contracts comprehensively, and will certainly promote its development in China.We address these various issues in the framework of principal-agent theory, and our main contributions are as follows:1. Deducing the pricing formula of executive stock option (ESO) which is different from Black-Scholes model in a new method called 'Certainty Equivalence'. ESO is not tradable, whose value is less than the economic cost the shareholders paid. So we cannot measure them by Black-Scholes model, otherwise the value will be overestimated and inevitably the incentive effect will also be overestimated. It is important to distinguish the value and the cost of ESO, which is the premise of studying the incentive effects and performances of ESO contracts.2. Studying ESO contracts from a new perspective, namely evaluating the performance of ESO contracts from the shareholders. Most literature only studied the incentive effects of ESO based on pay-for-performance. We apply Cost-to-Value in accountings field as the index of performance of ESO contracts, and then analyze the affecting factors.3. Considering the incentive effect and performance of ESO contracts synthetically we get the condition that the optimal stock option contract should meet, and then we analyze and simulate the main parameters of optimal stock option contract.4. Studying all aspects of ESO contracts systematically, which will be helpful to design stock option contracts to some extent.