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

39 Pages Posted: 27 Aug 1999

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Multiple version iconThere are 2 versions of this paper

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

Rajgopal, Shivaram and Shevlin, Terry J. and Shevlin, Terry J., Empirical Evidence on the Relation between Stock Option Compensation and Risk Taking (October 2001). Available at SSRN: https://ssrn.com/abstract=172689 or http://dx.doi.org/10.2139/ssrn.172689

Shivaram Rajgopal (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

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