The Effect of Executive Stock Options on Corporate Innovative Activities

Yenn-Ru Chen, Carl R. Chen and Chih-Kang Chu

Financial Management, 2014, vol. 43, issue 2, 271-290

Abstract: type="main">

This study investigates whether the implicit optionality of executive stock options (ESOs) induce managers to undertake innovative activities associated with various types of risk. We find ESO risk incentive (vega) to be positively correlated with all types of corporate innovations. We also find greater ESO risk incentive effects for the product-related innovative activities that are associated more with systematic risk than idiosyncratic risk. Finally, we document the following pecking order for the ESO risk incentive effects: improved product, new product, alliance, and new research and development. Our results suggest that executives have more incentive to invest in projects with higher systematic risk.

Date: 2014
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