Do stock options encourage managers to take risk?

The empirical results derived from our fixed effects model provide no support for a linkage between a CEO\u27s stock option grant and future firm risk. We find, using the panel corrected error term methods (PCSE) that control for the heteroscedasticity and autocorrelation, that current period stock option awards do have a positive effect on future firm risk. From the PCSE model we also find that the current year\u27s market risk premium has a statistically significant negative effect on firm risk. The paper shows that changes in an executive\u27s base salary can be used to mitigate the influence that stock option grants have on future firm risk. Of particular importance to shareholders is our finding that the firm\u27s future risk profile increases with CEO tenure, suggesting that CEOs adopt more aggressive strategies over time