The incentive effects of executive stock options: evidence from international acquisitions

Abstract

I investigate the effect of managerial incentives on international acquisition decisions by examining the relationship between executive stock options and the risk characteristics of international acquisition decisions. To identify how managerial motives are more likely to play a role under different circumstances, I separate international acquisitions into negative and positive announcement period return transactions. I document a positive relationship between the acquiring firm’s executive stock options and the risk change of a firm with negative announcement returns. If the effects of risk-taking on option values are sufficiently high, managers engage in excessive risk taking to increase their option’s value when international acquisitions are negative NPV projects. I find the opposite relationship for firms with positive announcement returns. As long as international acquisitions are positive NPV projects, managers care more about the concavity of their utility function than the convexity of an option’s payoff with the increase of firm risk.