Quantitative Research On The Incentive Mechanism Of Executive Stock Option

Principal-agency problems, which arise from the separation between ownershipand control in modern enterprises, are ascribed to the information asymmetry betweenowners and managers, together with the complexity and uncertainty of economicalenvironments. Monitoring mechanisms, though in a sense will alleviate some of theagency problem, monitoring without incentives is proved to be inefficient. Therefore,incentive mechanism becomes one of the important research topics in resolving theprincipal-agency problem in modern enterprises, among which the incentivemechanism of the executive stock option is the heated research topic in the last twodecades. Most of the available literature abroad concerning the issues in questionadopt the Black-Scholes option as an incentive program for the executive stock option,and make empirical analysis of the executive compensation and the performance ofthe corporation; whereas the majority of the domestic literature just provide aqualitative introduction of the executive stock option system and the conditioned thesystem applies to. The latter research lacks its academic vigor and rigidity, as it wantsquantitative analysis and in-depth investigation.The present dissertation, from the point of option pricing technology, concentrates on the exploration into the problems which result from Black-scholes option used as executive incentive. Attempts are also made to improve the executive option pricing method. The present dissertation consists of five parts.Part One consists of Chapter One, which is an introduction. In this part, I propose the theme of the present study, specifically I explain why managers are allowed to share the surplus of the enterprise and the principle of incentive mechanism designing, i.e, the model of principal-agency, which is highly essential basis for my further research in the rest part of dissertation.Part Two Consists of Chapter Two, it introduces the latest development of the option pricing theory and the mathematical model in Black-scholes option pricing method. It also demonstrates and analyses theoretically and empirically the positive role of conferring executive options to managers. Efforts are also made in this chapterto investigate the problems that arise from the implementation of the Black-Scholes as the executive option incentive. In the last part of this chapter, I propose some ways to address these problems.Part three consists of three chapters, i.e. Chapter Three-Five, Chapter Threeaddresses the questions concerning the likelihood of the controlling point price andthe increase of the risk of executive option, which results from the relatively greatfluctuality of point price. I propose that efforts are made to adopt the mean price inthe intermittent option instead of the point price at the end of the option to evaluatethe profit of the executive stock option. I also construct a geometric mean optionpricing formula. A quantitative contrastive analysis is made between this formula andthe Black-Scholes option pricing formula. The results show that: (l)Adoption of theintermittent mean price instead of the point price at the end of the option will help toreduce the chances of profit-making manipulated by managers and to curb themanager's motive to control the stock price; (2)Generally speaking, stock price ofmean price option is more incentive to the managers than that of the Black-Scholes; (3)When the stock market slumps at the end of the option, mean price option will ensurea moderate insurance for the managers; (4)When stock price slumps alone with theoverall situation of the stock market in the intermittent option, mean price option .however, will be inefficient as an incentive. Chapter Four addresses the questionsconcerning the manager's manipulation of the stock price, and the increase of theoption risks because of long-term slump of the stock market. I suggest to adoptmethods to restrict the fluctuating of stock pricing to...