Do Executive Stock Options Induce Excessive Risk Taking?

44 Pages Posted: 27 Aug 2012

See all articles by Zhiyong Dong

Zhiyong Dong

Beijing University

Cong Wang

The Chinese University of Hong Kong, Shenzhen

Fei Xie

University of Delaware - Lerner College of Business and Economics; European Corporate Governance Institute (ECGI)

Date Written: March 29, 2010

Abstract

We examine whether executive stock options can induce excessive risk taking by managers in firms’ security issue decisions. We find that CEOs whose wealth is more sensitive to stock return volatility due to their option holdings are more likely to choose debt over equity as a capital-raising vehicle. More importantly, the pattern holds not only in firms that are underlevered relative to their optimal capital structure but also in overlevered firms. This evidence is inconsistent with executive stock options aligning the interests of managers and shareholders; rather, it supports the hypothesis that stock options sometimes make managers take on too much risk and in the process pursue suboptimal capital structure policies.

Keywords: Executive stock options, Excessive risk taking, Capital structure, Securities offerings

JEL Classification: G30, G32

Suggested Citation

Dong, Zhiyong and Wang, Cong and Xie, Fei, Do Executive Stock Options Induce Excessive Risk Taking? (March 29, 2010). Journal of Banking and Finance, Vol. 34, 2010. Available at SSRN: https://ssrn.com/abstract=2136563

Zhiyong Dong

Beijing University

Beijing, 100871
China

Cong Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Fei Xie (Contact Author)

University of Delaware - Lerner College of Business and Economics ( email )

42 Amstel Ave
Newark, DE 19716
United States
(302) 8313811 (Phone)

HOME PAGE: http://sites.google.com/site/feisresearch/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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