Do Stock Options Encourage Managers to Take Risk?
نویسندگان
چکیده
The empirical results derived from our fixed effects model provide no support for a linkage between a CEO's stock option grant and future firm risk. We find, using the panel corrected error term methods (PCSE) that control for the heteroscedasticity and autocorrelation, that current period stock option awards do have a positive effect on future firm risk. From the PCSE model we also find that the current year's market risk premium has a statistically significant negative effect on firm risk. The paper shows that changes in an executive's base salary can be used to mitigate the influence that stock option grants have on future firm risk. Of particular importance to shareholders is our finding that the firm's future risk profile increases with CEO tenure, suggesting that CEOs adopt more aggressive strategies over time.
منابع مشابه
The Incentive Effect of Executive Stock Options on Corporate Investment Strategy: the Evidence of Strategic Alliance
A distinctive feature of stock options is that they create incentives for managers to take more risks. For a sample of 12,071 firm-year observations over 1992-2003, we find that the risk-taking incentives of executive stock options (the sensitivity of ESO values to stock return volatility) are significantly associated with greater risk-taking behavior, measured by corporate alliances, in the fo...
متن کاملMeasuring managerial incentives to increase firm volatility provided by debt , stock , and options
A large literature uses the sensitivity of stock options to an increase in stock volatility (“vega”) as a proxy for managers’ risk-taking incentives. Vega captures the sensitivity of options to stock volatility, but ignores the fact the employee options are warrants. When an increase in volatility increases option value, the increase in option value comes from a decrease in the value of the sto...
متن کاملManagerial Stock and Option Holdings and Fraudulent Financial Reporting of IPO Firms
I examine whether managerial stock and options holdings influence the propensity of goingpublic firms to manipulate financial information, as measured by the incidence of shareholder class action lawsuits and discretionary accruals. Examining a sample of U.S. firms that went public during the years 1996-2006, I find some evidence that firms in which top managers receive large stock options gran...
متن کاملRisk Choices and Compensation Design
We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired projec...
متن کاملOverconfidence , Investment Policy , and Executive Stock Options ∗
Managers make decisions on behalf of shareholders. In this context, financial economists have promoted executive stock options as a means to realign the incentives of managers with those of shareholders. We argue that overconfidence and optimism, which are likely to characterize managers, provide an alternative solution to this agency problem. Whereas risk-averse rational managers tend to postp...
متن کامل