Managerial stock option compensation in levered firms

By modeling the relationship between managerial option compensation and his investment strategies, and by numerical simulations of the influence of stock options on the manager's investment strategies, this paper studies whether option compensation could aggravate or alleviate agency cost in levered firms. We find that depends on the corporate governance of firms, managerial stock options may not necessarily aggravate agency costs in levered firms. If debt-holders were entitled to set managerial option compensations together with stockholders, stock option compensation may alleviate agency costs in levered firms.