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Do executive stock options induce excessive risk taking?

  • Dong, Zhiyong
  • Wang, Cong
  • Xie, Fei
Registered author(s):

    We examine whether executive stock options can induce excessive risk taking by managers in firms' security issue decisions. We find that CEOs whose wealth is more sensitive to stock return volatility due to their option holdings are more likely to choose debt over equity as a capital-raising vehicle. More importantly, the pattern holds not only in firms that are underlevered relative to their optimal capital structure but also in overlevered firms. This evidence is inconsistent with executive stock options aligning the interests of managers and shareholders; rather, it supports the hypothesis that stock options sometimes make managers take on too much risk and in the process pursue suboptimal capital structure policies.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00136-6
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2518-2529

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2518-2529
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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