What are the advantages and disadvantages of increasing the options granted to CEOs?

The advantage of increasing the options granted to CEOs can be summarized as: options increase in value when the firm’s stock price increases so CEO’s wealth and incentives will be more closely tied to the shareholders’ wealth.

The disadvantage is that option grants can increase a CEO’s incentives to game the system by timing the release of information to fit the option granting schedule or to artificially smooth earnings. Although backdating is illegal, some recent studies have shown that executives receive stock options that are already in the money.

Is it necessarily true that increasing managerial ownership stakes will improve firm performance?

First, although academic studies have supported the notion that greater managerial ownership is associated with fewer value-reducing actions by managers, there is no reason to expect a simple relation between ownership and performance. There are also other ways of managing the company. The correct ownership level for one firm may not be the correct level for another. Second, academic studies have shown a non-linear relation between firm valuation and ownership—specifically that increasing ownership is good at first, but that in a certain range, managers can use their ownership level to partially block efforts to constrain them, even though they still own a minority of the shares.

What are the costs and benefits of prohibiting insider trading?

Insider trading occurs when a person makes a trade based on privileged information. Managers have access to information that outside investors do not have. By using this information, managers can exploit profitable trading opportunities that are not available to outside investors.

If they were allowed to trade on their information, their profits