Predicting the Investment Decisions of Managers under the Influence of Stock Option Incentives

The purpose of this paper is to describe the nature of the risks inherent in the different elements of the pay mix that make up total managerial compensation, paying specific attention to stock options. We then analyze the investment options available to managers in light of the likely impact on their stock option compensation prospects, and predict which investment (distribution) decision is more likely. We also present the argument that managers can easily disguise their self-interests, or managerial opportunism, by manipulating firm investment decisions to favor alternatives that provide the greatest likelihood of personal gain in the short term. Research propositions are offered following a review of the relevant literature.