The effect of optimal investment by stock options incentive under economic policy uncertainty

Abstract

ABSTRACT This study shows that executive stock options are an effective compensation policy that takes corporate investment to the optimal level in the presence of unpredictable risk from economic policy uncertainty (EPU). We aim to explore whether stock options provide incentives for executives to choose a project that the optimal investment needs to be implemented. We use delta and vega as a proxy for price sensitivity and compensation sensitivity, respectively, to examine the interaction between executive stock options portfolio and EPU. We use delta for price sensitivity and vega for compensation sensitivity, respectively, to examine the interaction between executive stock options portfolio and EPU. Our analysis shows that a well-designed compensation structure motivates executives to maintain the optimal investment level when faced with unpredictable risks.