Revisiting the risk-taking effect of executive stock options on firm performance
AbstractWhile 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 InfoArticle provided by Elsevier in its journal Journal of Business Research.
Volume (Year): 64 (2011)
Issue (Month): 6 (June)
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Web page: http://www.elsevier.com/locate/jbusres
Executive compensation CEO stock options Managerial risk-taking Risk aversion Firm performance;
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