Equity Stock Options And Risk Taking

As a scheme of long term stimulation, Executive Stock Option (ESO) is aimed at decreasing agency costs between executives and shareholders. With ESO, executives are more concerned with the development of the company, which is connected with risk taking. Most former Chinese literature just studied the influence of ESO on performance of the company, and used dummy variable to measure ESO. Therefore, this paper is using vega to measure ESO and estimating risk taking from two aspects:investment policies and operating policies. It means, this paper analyzes the relationship between vega and risk taking by using stata12.By using the non-balanced panel data from2010to2013of listed companies in A-shares market, this paper analyzes whether the companies with ESO would stimulate the executives to engage in more risk taking, which means more expenses on R&D, less expenses on CAPEX and higher LEV.Executive might gain profits with higher stock price volatility that expressed by index vega, and it means executives might gain profits with higher vega. Therefore, ESO might decrease the risk aversion of executive, which would result in more risk taking.Just because ESO and risk taking have mutual influence, this paper would analyze the effect of vega on risk taking, as well as the effect of risk taking on vega. And the paper is using2SLS to avoid endogeneity. The results indicate that vega and R&D have mutual influence, and the outcome is not significant because the limitation of data number. Vega and CAPEX have mutual negative influence and of significance, and vega and LEV have mutual positive influence and of significance. For the analysis of vega and R&D, the number of companies is only85for most companies did not publish their cost on R&D, and for the other two analysis, the number is248. The results indicate that in A-shares market, ESO would affect the investment decisions and operating policies of executive, which means that the companies should take the effect of ESO into consideration while designing the stimulation scheme for executive.