Stock Options May Increase Risk-Taking Behavior Among Executives, Study Finds

The amount of risk chief executives are willing to take may be directly related to their personal compensation and benefits packages. That is the conclusion of a study published this week by Washington University in St. Louis.

Todd Milbourn, a finance professor at the Olin Business School, says the amount of stock options a CEO is afforded can lead to a surge in risk-taking behaviors.

"Our findings suggest that the structure of a manager's compensation significantly affects how managers will guide their firms in reaction to large, adverse shocks, such as disruptive product innovations, relaxation of international trade barriers or changes to government regulation," Milbourn said in a statement.

More specifically, the research found CEOs with compensation based on straight-equity holdings tend to reduce revenues within the company when volatility to these risks increases. Conversely, compensation tethered to upside performance leads to more restrained cash flow to protect the company from risk.

The study adds that boards may want to consider leveraging restricted stock options for CEOs in order to curb risk-taking behaviors.