Stock Option Grants and Managerial Risk Taking: Evidence from Japanese Intraday Stock Return Data

Abstract

This paper investigates whether stock option grants increase managerial risk taking in Japan by using intraday stock return data as well as daily stock return data and yearly financial data. As with previous US studies, we find that firms that announce stock option grants experience significantly higher increase in realized stock volatility than matched peers do during 201 days surrounding the announcement day. We also find a significant increase in their leverage during the three years after the event year. Importantly, those companies experience significantly higher increase in realized volatility during a few days surrounding the announcement day which is computed by the intraday stock return. This result provides evidence that stock options give managers an incentive to take risk in a research environment that suffers less from contamination effects and endogeneity problems. However, there is no evidence that the increased managerial risk-taking creates shareholder wealth.