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Abstract Based on literature, this paper provides an audit mechanism with the optimal contract, which focuses on the adverse selection problem in the options investment. This mechanism is practical due to the endogenous punishment. The effects of the mechanism on both the efficiency of options investment and on the substitution of the incentive mechanism are analyzed. These substitution effects involve two aspects: the complete substitution to efficiency of investment exercising and the partial substitution to information rents. Due to the options characteristics of the audit mechanism, the optimal audit mechanism is complex. The numerical simulation method is adopted to analyze it. Finally, based on the background of government's project auditing and supervising, this paper analyzes the application of investment options audit mechanism based on the signal of stock price in order to provide some suggestions for the government to build a effective supervising mechanism of the project investment.
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Received: 15 June 2009
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2009, Vol. 1 
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