Munich Personal RePEc Archive Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management Jackwerth, Jens Carsten and Hodder, James E. Universität Konstanz, University of Wisconsin-Madison 25 February 2008 Online at https://mpra.ub.uni-muenchen.de/11643/ MPRA Paper No. 11643, posted 19 Nov 2008 06:48 UTC Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management by James E. Hodder and Jens Carsten Jackwerth February 25, 2008 James Hodder is from the University of Wisconsin-Madison, Finance Department, School of Business, 975 University Avenue, Madison, WI 53706, Tel: 608-262-8774, Fax: 608-265-4195,
[email protected]. Jens Jackwerth is from the University of Konstanz, Department of Economics, PO Box D-134, 78457 Konstanz, Germany, Tel.: +49-(0)7531-88-2196, Fax: +49-(0)7531-88-3120,
[email protected]. We would like to thank David Brown, George Constantinides, Sanjiv Das, Jin-Chuan Duan, Günter Franke, Ken Kavajecz, Bob Jarrow, Mark Ready, and Mark Rubinstein for helpful comments on earlier versions of the paper. We also thank seminar participants at the 15th Annual Derivative Securities and Risk Management Conference, Arlington,VA; the 2006 Frontiers of Finance Conference, Bonaire; ISCTE, Lisbon; Hebrew University; Manchester University; Tel Aviv University; University of Wisconsin-Madison; and Warwick University. Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management Abstract We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth.