Reference no: EM13840108

Financial management assignment

(Maximum word limit 700 words, at least 5 references)

In an effort to analyse the agency problem and the firm value maximisation, Hanlon, Rajgopal and Shevlin (2003) p.4. state
"The incentive alignment perspective typically advocated by a number of financial economists states that options are granted to reduce the moral hazard problem that stems from senior managers owning very little of the firms they manage. A substantial body of theoretical work beginning with Jensen and Meckling (1976) suggests that option contracts can align managers' incentives with that of shareholders. Consistent with this perspective, researchers (e.g., Demsetz and Lehn 1985; Himmelberg, Hubbard and Palia 1999; Core and Guay 1999; Rajgopal and Shevlin 2002) have predicated their analyses on the premise that granting options is consistent with firm value maximization."

Hanlon, M., Rajgopal, S. and Shevlin, S. (2003), ‘Are Executive Stock Options Associated with Future Earnings?' Journal of Accounting and Economics, Vol 36(1), p.3 - 43.

Explain the concept ‘executive stock options'. What are the advantages and disadvantages of ‘executive stock options'? Students are strongly urged to read reviewed journal articles and provide at least five academic journal articles in the reference. Please note: understanding the notions in the articles is more important than an entanglement with the advance math in many of the articles.