Empirical Evidence on the Relation between Stock Option Compensation and Risk Taking
39 Pages Posted: 27 Aug 1999
There are 2 versions of this paper
Empirical Evidence on the Relation between Stock Option Compensation and Risk Taking
Date Written: October 2001
Abstract
We examine whether executive stock options (ESO) encourage managers to make risky investments on behalf of shareholders. For a sample of oil and gas producers, we find, as predicted, that the variance of cash flows from exploration activity and the extent of price risk exposure hedged are positively associated with the sensitivity of CEO's options to equity risk. Thus, ESOs appear to motivate managers to take on exploration risk. Moreover, ESOs appear to induce CEOs to hedge oil price risk to avoid under-investment in exploration projects.
Note: Previously titled: "Stock Option Compensation and Risk Taking: The Case of Oil and Gas Producers"
JEL Classification: J33, M40, G31, G32
Suggested Citation: Suggested Citation
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