Repeated Career Options: A Contingent Claims Approach

Treussard, Jonathan

doi:10.2139/ssrn.1003659

“…This implies that the strike price in (2.5), based on the value of the regulator's pre-career change compensation package, must be compared to the firm's debt firm debt (αD) which serves double duty as the strike price in Merton (1974) firm valuation formula in (2.7). This Margrabe (1978) style option pricing problem was solved by Treussard (2007) and Bodie et al (2008). So we take it as given in the sequential move setting above.…”

Section: Regulator Entersmentioning

confidence: 99%

“…Relative to any given beta level that might hold in the case of a disinterested regulator, we argue there will be a beneficial impact on the firms beta when a regulator exercises her career option to join the firm 4 . Whereas Treussard (2007) and Bodie et al (2008) solve the problem of when to switch careers, our model's focus is on what happens once a regulator decides to switch career and take an executive level position with a firm she regulates. Here, she embeds her human capital beta 5 in the firm's capital structure and observes a valuation effect.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Bankruptcy risk induced by career concerns of regulators

Cole

¹

,

Cadogan

²

2014

Finance Research Letters

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We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm's capital structure, in order to enhance the value of her post career change indexed executive stock option contract with the firm. We prove that the agency cost of this revolving door behavior increases the firm's financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR).

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“…and Jonathan Treussard (2007) and Treussard (2007) have modeled the ability to switch careers as an American-style spread option. 5…”

Section: The Option To Switch Careersmentioning

confidence: 99%

Contingent Claims Analysis and Life-Cycle Finance

Bodie

¹

,

Ruffino

²

,

Treussard³

2008

Self Cite

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This paper explores the application of contingent claims analysis (CCA) to two "hot" issues in life-cycle finance: (1) investing for retirement and (2) deciding when, if ever, to switch careers.Participants in individual retirement accounts do not have the time or the knowledge to make their own investment decisions. Today they are defaulted into life-cycle mutual funds that pass all risk directly through to the participant. We use CCA to demonstrate how financial firms can design and produce guaranteed contingent benefit contracts that improve participant welfare at no additional cost to the system. In exploring the career-choice issue in the second part of the paper, we use CCA in a somewhat different way. The decision to switch careers is analogous to deciding when to exercise an American-style option to swap one asset for another. By applying the methods used to analyze the option-exercise decision to the career-switching problem, we gain some new insights beyond those derived from the traditional dynamic programming approaches.

show abstract

“…Page 9 and Jonathan Treussard (2007) and Treussard (2007) have modeled the ability to switch careers as an American-style spread option.…”

Section: The Option To Switch Careersmentioning

confidence: 99%

Contingent Claims Analysis and Life-Cycle Finance

Bodie

¹

,

Ruffino

²

,

Treussard

³

2008

American Economic Review

Self Cite

View full text Add to dashboard Cite

This paper explores the application of contingent claims analysis (CCA) to two "hot" issues in life-cycle finance: (1) investing for retirement and (2) deciding when, if ever, to switch careers.Participants in individual retirement accounts do not have the time or the knowledge to make their own investment decisions. Today they are defaulted into life-cycle mutual funds that pass all risk directly through to the participant. We use CCA to demonstrate how financial firms can design and produce guaranteed contingent benefit contracts that improve participant welfare at no additional cost to the system. In exploring the career-choice issue in the second part of the paper, we use CCA in a somewhat different way. The decision to switch careers is analogous to deciding when to exercise an American-style option to swap one asset for another. By applying the methods used to analyze the option-exercise decision to the career-switching problem, we gain some new insights beyond those derived from the traditional dynamic programming approaches.

show abstract

Repeated Career Options: A Contingent Claims Approach

Cited by 4 publications

References 38 publications

Bankruptcy risk induced by career concerns of regulators

Bankruptcy risk induced by career concerns of regulators

Contingent Claims Analysis and Life-Cycle Finance

Contingent Claims Analysis and Life-Cycle Finance

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