Behavioral Responses of CEOs to Stock Ownership and Stock Option Pay

Abstract

Executive stock ownership and stock option pay are often assumed to have congruent incentive effects; however, these incentives have asymmetrical risk properties, and executives may respond to them in different ways. This study, which examined the effects of ownership and option pay, showed that they had diametrically opposite effects on firms' acquisition and divestiture propensity. Moreover, situational characteristics moderated the risk-seeking behavior associated with stock option pay but not the risk aversion associated with ownership.