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Revisiting the risk-taking effect of executive stock options on firm performance

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  • Chen, Yenn-Ru
  • Ma, Yulong
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    Abstract

    While the relation between equity-based compensation and firm performance has been widely discussed, the findings on how executive stock options (ESOs) affect firm value are still inconclusive. This research examines the risk-taking effect of ESOs on firm performance by taking into consideration managers' personal risk aversion. A three-stage-least-squares approach is adopted to examine a simultaneous system of equations describing option compensation, risk-taking, and firm performance. Evidence confirms that ESOs increase managerial risk-taking, but such risk-taking is constrained by managers' personal risk aversion. In addition, evidence indicates that managerial risk-taking induced by ESOs would increase both long-term and near-term stock returns. The negative impact on near-term and the positive impact on long-term returns on investment imply that it takes time for accounting performance to reflect the risk-taking effect of ESOs. These results further indicate that managers focus their concerns more on stock risk and return rather than near-term accounting results.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 64 (2011)
    Issue (Month): 6 (June)
    Pages: 640-648

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    Handle: RePEc:eee:jbrese:v:64:y:2011:i:6:p:640-648

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    Web page: http://www.elsevier.com/locate/jbusres

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    Keywords: Executive compensation CEO stock options Managerial risk-taking Risk aversion Firm performance;

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    Cited by:
    1. Crutchley, Claire E. & Minnick, Kristina, 2012. "Cash versus incentive compensation: Lawsuits and director pay," Journal of Business Research, Elsevier, Elsevier, vol. 65(7), pages 907-913.

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