Call option compensation and managers’ intertemporal risk-taking behaviour

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Acknowledgements

I am indebted to Stephen Ross for insightful comments on an earlier version of this paper. I am grateful to two anonymous referees for helpful discussions that substantially improved the quality of the paper. All remaining errors are mine.

Notes

No potential conflict of interest was reported by the author.

1 The PBGC guarantees private defined benefit pension plans. If a sponsoring company goes bankrupt with an underfunded pension plan, the PBGC covers the pension deficit.

2 Admati and Pfleiderer (1997) criticize the use of benchmark portfolios in compensation schemes. They find that the use of these benchmark portfolios cannot be easily rationalized. Benchmark portfolios are generally inconsistent with optimal risk-sharing and they do not lead to the choice of an optimal portfolio for the investor.

3 The translation effect does not exist in the case of a CARA function.