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A dynamic analysis of executive stock options: Determinants and consequences

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  • Chen, Yenn-Ru
  • Lee, Bong Soo

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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  • Chen, Yenn-Ru & Lee, Bong Soo, 2010. "A dynamic analysis of executive stock options: Determinants and consequences," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 88-103, February.
    • Handle: RePEc:eee:corfin:v:16:y:2010:i:1:p:88-103
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    Cited by:

    1. Terence Tai Leung Chong & Yue Ding & Yong Li, 2015. "Executive Stock Option Pricing in China Under Stochastic Volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(10), pages 953-960, October.
    2. Yenn-Ru Chen & Carl R. Chen & Chih-Kang Chu, 2014. "The Effect of Executive Stock Options on Corporate Innovative Activities," Financial Management, Financial Management Association International, vol. 43(2), pages 271-290, June.
    3. James Gong & Siyi Li, 2013. "CEO incentives and earnings prediction," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 647-674, May.
    4. MORIKAWA Masayuki, 2012. "Stock Options and Productivity: An empirical analysis of Japanese firms," Discussion papers 12011, Research Institute of Economy, Trade and Industry (RIETI).

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