Executive Stock Options: Incentive-related Issues As Convexity And Its Application In China Study

Based on the convexity characterics of stock option, this dissertation analyzed the shortcomings of the principal-agent model. By incorporating the features of enterprises' types into the model and analyzing managers' actions within speculative stock markets and managers' influences on the board of directors, this dissertation further developed the original model. With the improved model, a new explanation on corporate scandals since late 2001 is provided.As the principal-agent model indicated, with participant constraints and incentive compatibility constraints, the best remuneration contract to managers should include long-term incentives to maximum the shareholder value, and thus, the stock-based incentives are introduced into the compensation package. Generally speaking, managers are risk averse. However, it is also necessary for managers to take some risky actions in management. This dissertation proved the necessity to add convex incentives into the package.This dissertation's analysis process focused on reasoning by releasing the assumptions in the former models gradually. Firstly, releasing the assumption that the effects of managers' actions on the firm performance and stock prices are identical among different companys, the dissertation analyzed the different effects of managers' efforts on stock prices between different companys. And came to the conclusion that the convex incentives - stock options incentives should vary among different types of firms. Companys with high growth opportunities can adopt more convex incentives, yet companys with medium or low growth opportunities should avoid using stock options as managers' remuneration. We can explain the Enron's scandals as well as Silicon Valley's high-tech companys' big successes using this method.Secondly, releasing the assumption that stock markets are efficient infers managers' actions in a speculative market. As some investors are over confident, managers will take actions pursuing short-term performances. Furthermore, because of stock markets' cycle, one company's stock price would deviate significantly from its real value due to the markets' or sectors' fluctuations instead of its own reasons.