CEO Stock Options and Equity Risk Incentives

56 Pages Posted: 4 Oct 2000

See all articles by Melissa A. Williams

Melissa A. Williams

University of Houston, Clear Lake - School of Business and Public Administration

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

Abstract

We test the hypothesis that the risk incentive effect of CEO stock option grants motivate managers to take on more risk than they would otherwise. The hypothesis is tested using a sample of completed mergers and also a broader cross-section of firms. For the merger sample, we document that variance increasing mergers are associated with greater CEO stock option risk incentives in the year prior to the merger announcement. We also find that mergers accompanied by leverage increases have greater CEO stock option risk incentives. These relationships are found to hold for NASDAQ firms but not for NYSE/AMEX firms. For the broader cross-sectional sample of firms we find that there is a strong positive relationship between CEO risk incentive embedded in the stock options and subsequent equity volatility. This evidence is stronger for NASDAQ firms than for NYSE/AMEX firms. Overall, our evidence supports the view that stock options are useful in moderating CEO's inherent preference for engaging in lower corporate risk activity than preferred by outside shareholders.

Keywords: compensation, structure, stock options, incentive effects, equity risk, firm performance

JEL Classification: J33, J41, G34

Suggested Citation

Williams, Melissa A. and Rao, Ramesh P., CEO Stock Options and Equity Risk Incentives (July 2000). Available at SSRN: https://ssrn.com/abstract=239640 or http://dx.doi.org/10.2139/ssrn.239640

Melissa A. Williams (Contact Author)

University of Houston, Clear Lake - School of Business and Public Administration ( email )

Houston, TX 77058
United States
(281) 283-3211 (Phone)
(281) 283-3951 (Fax)

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
907
Abstract Views
4,017
rank
24,014
PlumX Metrics