Assessing the effect of executive stock option plans on agency costs and risk-taking behavior of managers in listed firms for the years 2002-2006

• Main Authors: Del Ayre, Kris Angeline, Guasa, Chino Paolo, Relucio, Caryl Bevvy, Tan, Maryrose Leigh Vy
• Format: text
• Language: English
• Published: Animo Repository 2008
• Subjects: Corporate governance > Philippines; Employee stock options > Philippines; Stock options > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/7156
• Institution: De La Salle University

The design of compensation schemes has been a dominant approach in corporate institutions to remedy the agency problem. One particular incentive is executive stock option plans. Providing a direct link between realized compensation and company stock-price performance, stock options functions to mitigate underinvestment by inducing managers to undertake high-risk but profitable investments. Using panel data from 2002-2006 for 60 firms listed in the Philippine Stock Exchange, we find that executive stock options induce risk-taking for holding firms only and consequently decrease agency costs in this sector as well. We also find that, in general, top managers continue to exhibit risk-aversion despite the issuance of stock option plans. From these results, we posit that the improvement in corporate governance practices plays an important role in reducing managerial power and managerial rent extraction.