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A dynamic analysis of executive stock options: Determinants and consequences

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  • Chen, Yenn-Ru
  • Lee, Bong Soo
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    Abstract

    We investigate the determinants of executive stock options (ESOs) and their impact on risky investment and subsequent firm performance in a dynamic setting. We find that, first, the dynamic response of ESOs to growth opportunity and risk is positive and lasts for two to three years. Second, the dynamic response of risky investments to option compensation is positive but converges to zero after three years. More importantly, the positive effect of ESOs on risky investments is observed when CEOs' personal risk-aversion is taken into account. Third, accounting performance responds positively to the risky, option-induced investment, but the dynamic effect lasts only for one year. Meanwhile, when managers undertake more risky investments than what ESOs imply, accounting performance responds negatively to the over-investment.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0929-1199(09)00071-6
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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 16 (2010)
    Issue (Month): 1 (February)
    Pages: 88-103

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    Handle: RePEc:eee:corfin:v:16:y:2010:i:1:p:88-103
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

    Keywords: Executive stock options Growth opportunity Capital investment and performance Dynamic analysis;

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    Cited by:

    1. James Gong & Siyi Li, 2013. "CEO incentives and earnings prediction," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 647-674, May.
    2. Chong, Terence Tai Leung & Ding, Yue & Li, Yong, 2015. "Executive Stock Option Pricing in China under Stochastic Volatility," MPRA Paper 63397, University Library of Munich, Germany.

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