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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

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.

Suggested Citation

  • Chen, Yenn-Ru & Ma, Yulong, 2011. "Revisiting the risk-taking effect of executive stock options on firm performance," Journal of Business Research, Elsevier, vol. 64(6), pages 640-648, June.
    • Handle: RePEc:eee:jbrese:v:64:y:2011:i:6:p:640-648
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