Author(s): Hussam A. Al-Shammari
Using an agency theory framework, we investigate the relationship between CEO option pay and CEO risk-taking behavior. We integrate the incentive alignment and monitoring approaches to reducing principal-agent conflicts by considering them simultaneously. We develop and test hypotheses that suggest that aspects of the governance system of a firm moderate the relationship between CEO option pay and CEO risk-taking. Results based on data collected from 204 Fortune 1000 U.S. manufacturing firms revealed a strong, positive relationship between CEO option pay and CEO risk-taking. Further, moderating effects were found for CEO duality, blockholder ownership, institutional ownership, and insider ownership. However, empirical analyses fail to provide adequate evidence to support the expected moderating effect of board independence.