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Abstract
We analyze how CEO stock options compensation can be used as a commitment device in oligopolistic competition. We develop a two‐stage model where shareholders choose managerial compensation to commit their managers to being aggressive in equilibrium. Our results may explain why some shareholders appear to incentivize ‘excessive’ risk taking through stock options compensation. We analyze how our results are impacted by product quality, marginal cost, product differentiation, and industry concentration. As motivation for our research, we show that there exists positive empirical correlation between industry concentration and options compensation vega within a sample of firms, as suggested by our model. Copyright © 2016 John Wiley & Sons, Ltd.
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