Do executive stock options induce excessive risk taking?

Zhiyong Dong, Cong Wang and Fei Xie

Journal of Banking & Finance, 2010, vol. 34, issue 10, 2518-2529

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 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (45)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:34:y:2010:i:10:p:2518-2529

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