Empirical Evidence on the Relation Between Stock Option Compensation and Risk Taking

Topics:
Incentives and Compensation
Tags:
Exploration,
Incentive,
Reed Elsevier Inc.,
Sales,
Sales Force Management,
Stock,
Stock Option
Source:
Reed Elsevier

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Overview: The paper examines whether executive stock options (ESOs) provide managers with incentives to invest in risky projects. For a sample of oil and gas producers, we examine whether the coefficient of variation of future cash flows from exploration activity (our proxy for exploration risk) increases with the sensitivity of the value of the CEO's options to stock return volatility (ESO risk incentives). Both ESO risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach. The paper finds evidence that ESO risk incentives have a positive relation with future exploration risk taking.

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Format: PDF | Size: 203KB | Date: Oct 2001 | Pages: 27

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