What Determines Stock Option Contract Design?

This paper analyzes factors driving the design of stock option plans for Finnish firms. We examine determinants of the scope of plans, exercise price, target group, and dividend protection. The scope is found to be negatively related to Tobin’s Q and positively related to proxies for monitoring costs. The scope is also greater in broad-based plans, and in plans with dividend protection. Prior stock return is found to be negatively related to the size of the premium (out-of-the-moneyness), whereas dividend protection increases the premium. The results also suggest that investment intensity, cash flow, and monitoring costs are associated with the likelihood of granting premium (out-of-the-money) stock options. Furthermore, the likelihood of granting broad-based plans is increasing in institutional ownership and cash flow constraints, and decreasing in firm size. Broad-based plans are also more likely among firms in growth industries. We find support that the likelihood of dividend protection is decreasing in foreign ownership. In addition, firms paying zero-dividends are less likely to include dividend protection, whereas higher unsystematic risk is associated with a greater likelihood of including dividend protection.

Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design

This paper addresses several questions in the compensation literature by examining stock option compensation practices of Finnish firms. First, the results indicate that principal-agent theory succeeds quite well in predicting the use of stock options. Proxies for monitoring costs, growth opportunities, ownership structure, and risk are found to determine the use of incentives consistent with theory. Furthermore, the paper examines whether determinants of stock options targeted to top management differ from determinants of broad-based stock option plans. Some evidence is found that factors driving these two types of incentives differ. Second, the results reveal that systematic risk significantly increases the likelihood that firms adopt stock option plans, whereas total firm risk and unsystematic risk do not seem to affect this decision. Third, the results show that growth opportunities are related to time-dimensional contracting frequency, consistent with the argument that incentive levels deviate more rapidly from optimum in firms with high growth opportunities. Finally, the results suggest that vesting schedules are decreasing in financial leverage, and that contract maturity is decreasing in firm focus. In addition, both vesting schedules and contract maturity tend to be longer in firms involving state ownership.

A new approach to the design of electronic exchanges

Electronic Exchanges are double-sided marketplaces that allows multiple buyers to trade with multiple sellers, with aggregation of demand and supply across the bids to maximize the revenue in the market. In this paper, we propose a new design approach for an one-shot exchange that collects bids from buyers and sellers and clears the market at the end of the bidding period. The main principle of the approach is to decouple the allocation from pricing. It is well known that it is impossible for an exchange with voluntary participation to be efficient and budget-balanced. Budget-balance is a mandatory requirement for an exchange to operate in profit. Our approach is to allocate the trade to maximize the reported values of the agents. The pricing is posed as payoff determination problem that distributes the total payoff fairly to all agents with budget-balance imposed as a constraint. We devise an arbitration scheme by axiomatic approach to solve the payoff determination problem using the added-value concept of game theory.

An iterative auction mechanism for combinatorial exchanges

Combinatorial exchanges are double sided marketplaces with multiple sellers and multiple buyers trading with the help of combinatorial bids. The allocation and other associated problems in such exchanges are known to be among the hardest to solve among all economic mechanisms. In this paper, we develop computationally efficient iterative auction mechanisms for solving combinatorial exchanges. Our mechanisms satisfy Individual-rationality (IR) and budget-nonnegativity (BN) properties. We also show that our method is bounded and convergent. Our numerical experiments show that our algorithm produces good quality solutions and is computationally efficient.

Tatonnement Mechanisms for Combinatorial Exchanges

Combinatorial exchanges are double sided marketplaces with multiple sellers and multiple buyers trading with the help of combinatorial bids. The allocation and other associated problems in such exchanges are known to be among the hardest to solve among all economic mechanisms. It has been shown that the problems of surplus maximization or volume maximization in combinatorial exchanges are inapproximable even with free disposal. In this paper, the surplus maximization problem is formulated as an integer linear programming problem and we propose a Lagrangian relaxation based heuristic to find a near optimal solution. We develop computationally efficient tâtonnement mechanisms for clearing combinatorial exchanges where the Lagrangian multipliers can be interpreted as the prices of the items set by the exchange in each iteration. Our mechanisms satisfy Individual-rationality and Budget-nonnegativity properties. The computational experiments performed on representative data sets show that the proposed heuristic produces a feasible solution with negligible optimality gap.

Trade determination in multi-attribute exchanges

Electronic exchanges are double-sided marketplaces that allow multiple buyers to trade with multiple sellers, with aggregation of demand and supply across the bids to maximize the revenue in the market. Two important issues in the design of exchanges are (1) trade determination (determining the number of goods traded between any buyer-seller pair) and (2) pricing. In this paper we address the trade determination issue for one-shot, multi-attribute exchanges that trade multiple units of the same good. The bids are configurable with separable additive price functions over the attributes and each function is continuous and piecewise linear. We model trade determination as mixed integer programming problems for different possible bid structures and show that even in two-attribute exchanges, trade determination is NP-hard for certain bid structures. We also make some observations on the pricing issues that are closely related to the mixed integer formulations.

Studies on a frustrated Heisenberg spin chain with alternating ferromagnetic and antiferromagnetic exchanges

We study Heisenberg spin-1/2 and spin-1 chains with alternating ferromagnetic (J(1)(F)) and antiferromagnetic (J(1)(A)) nearest-neighbor interactions and a ferromagnetic next-nearest-neighbor interaction (J(2)(F)). In this model frustration is present due to the non-zero J(2)(F). The model with site spin s behaves like a Haldane spin chain, with site spin 2s in the limit of vanishing J(2)(F) and large J(1)(F)/J(1)(A). We show that the exact ground state of the model can be found along a line in the parameter space. For fixed J(1)(F), the phase diagram in the space of J(1)(A)-J(2)(F) is determined using numerical techniques complemented by analytical calculations. A number of quantities, including the structure factor, energy gap, entanglement entropy and zero temperature magnetization, are studied to understand the complete phase diagram. An interesting and potentially important feature of this model is that it can exhibit a macroscopic magnetization jump in the presence of a magnetic field; we study this using an effective Hamiltonian.