The nonlinear relationship between CEO stock options and strategic risk taking: the moderating role of CEO characteristics

Purpose - The purpose of this study is to examine the nonlinear relationship between executive stock options and strategic risk taking and to investigate the moderating effect of CEO characteristics (CEO age and tenure). This study aims to analyze whether the impact of executive stock options on strategic risk-taking is moderated by CEO compensation and characteristics. Design/methodology/approach - This study is based on a sample of 90 French firms for the period extending from 2008 to 2021. To deal with the nonlinear relationship, the author adopts a dynamic threshold model. Findings - The results reveal that the impact of CEO stock options on firm strategic risk-taking is nonlinear and moderated by CEO age and tenure. Using research and development (R&D) as a measure of risk taking, the author show a positive relationship between executive stock option and R&D below the threshold value of stock option, CEO age and tenure and it becomes negative above. Research limitations/implications Stock options, CEO age and tenure shows that CEO characteristics and compensation structure are major determinants in defining the direction of the nonlinear relationship between CEO stock options and firm strategic risk-taking. Originality/value - The author extends through this paper the existing research on executive stock option, strategic risk-taking and CEO characteristics using a nonlinear dynamic estimator that caters to the problems of endogeneity. Insights from the findings provide boards and regulators with a better understanding of structuring CEO compensation.