CEO stock option wealth and strategic risk-taking: a behavioural agency perspective

Abstract: This study builds on the behavioural agency model to investigate the relationship between CEO stock option wealth and managerial strategic risk taking. This study reveals that stock options may both positively and negatively influence CEO's strategic risk taking, depending on whether they are exercisable or unexercisable, and depending on how much the accumulated cash value and prospective value is. Also, the relationship is partially moderated by bankruptcy risk of the company. Using panel data from manufacturing industries and composite measurements on CEO's ex ante strategic risk-taking, our findings suggest that current wealth of exercisable options discourages CEO's risk-taking, which is weakened by bankruptcy likelihood of the company. While on the other hand, current wealth of unexercisable options and prospective option wealth encourage risk-taking.