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CEO Stock Options and Equity Risk Incentives
Author(s) -
Williams Melissa A.,
Rao Ramesh P.
Publication year - 2006
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2006.01357.x
Subject(s) - incentive , stock options , executive compensation , equity (law) , stock (firearms) , restricted stock , equity risk , non qualified stock option , business , volatility (finance) , economics , financial economics , monetary economics , finance , microeconomics , stock market , private equity , mechanical engineering , political science , law , engineering , paleontology , horse , biology
We test the hypothesis that the risk incentive effects of CEO stock option grants motivate managers to take on more risk than they would otherwise. Using a sample of mergers we document that the ratio of post‐ to pre‐merger stock return variance is positively related to the risk incentive effect of CEO stock option compensation but this relationship is conditioned on firm size, with firm size having a moderating effect on the risk incentive effect of stock options. Using a broader time‐series cross‐sectional sample of firms we find a strong positive relationship between CEO risk incentive embedded in the stock options and subsequent equity return volatility. As in the case of the merger sample, this relationship is stronger for smaller firms.