Revisiting the risk-taking effect of executive stock options on firm performance |
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Authors: | Yenn-Ru Chen |
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Affiliation: | a Graduate Institute of Finance and Banking, College of Management, National Cheng Kung University, Tainan, 701 Taiwanb Department of Finance, College of Business Administration, California State University, Long Beach, Long Beach, CA 90840, United States |
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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. |
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Keywords: | Executive compensation CEO stock options Managerial risk-taking Risk aversion Firm performance |
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