Stock Options and Managers Incentives to cheat

We develop a continuous-time real options pricing model to study managers’incentives to cheat in the presence of equity-based compensation policies.We show that managers’ incentives to cheat are strongly influenced by theefficiency of the justice. Our model’s main result is that managers havegreater incentives to misreport with stock options than with common stocks.We finally propose a new compensation package consisting of long calls andshort puts that reduces managers’ incentives to cheat.