Swinging for the fences: The effects of CEO stock options on company risk taking and performance

W. M.Gerard Sanders, Donald C. Hambrick

Research output: Contribution to journalArticlepeer-review

359 Scopus citations

Abstract

We unpack the concept of managerial risk taking, distinguishing among three of its major elements: the size of an outlay, the variance of potential outcomes, and the likelihood of extreme loss. We then apply our framework in hypothesizing the effects of CEO stock options on strategic behavior and company performance. We find that CEO stock options engender high levels of investment outlays and bring about extreme corporate performance (big gains and big losses), suggesting that stock options prompt CEOs to make high-variance bets, not simply larger bets. Finally, we find that option-loaded CEOs deliver more big losses than big gains. Copyright of the Academy of Management, all rights reserved.

Original languageEnglish (US)
Pages (from-to)1055-1078
Number of pages24
JournalAcademy of Management Journal
Volume50
Issue number5
DOIs
StatePublished - Oct 2007

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

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