Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5090696 | Journal of Banking & Finance | 2010 | 12 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Zhiyong Dong, Cong Wang, Fei Xie,