The effect of executive stock option compensation to stock volatility: Evidence from the US market

In this paper, I study the relationship between executive stock option awarding and stock volatility. While stock options are a widely used tool to minimize moral hazard, finance theory also suggests that they should incentivize the manager to increase firm riskiness. This study provides further empirical support for the theory: I find a statistically significant connection between the executives’ option awards ratio and stock volatility. Despite the positive connection, the economic significance of the risk-increasing effect is relatively small. The findings are robust to the inclusion of entity and year fixed effects and do not seem to be driven by reverse causality