S & P 500 firms analysis of the effects of stock option compensation on risk taking behaviour and financial performance in the frame of agency theory

Agency theory is the basis for clarifying and explaining the firm management and ownership structure seperation in today?s business world. In this concept the theory has been searched alot and it can be told that the theory has a big role on solving the problems caused by principal and agent relations. Agency problems and agency costs which form the base of the theory, occur from the separation of management and ownership. This separation become into fact with the delegation of the authority. Agency theory is important and inevitable in frame ofquantifying and solving these problems caused by this seperation. The aim of this study is to figure out whether managerial risk taking behaviour and firm financial performance is effected by stock option compensation which is told to be a way to solve agency problems in the literature. It is analyzed how stock option compensation aligns the shareholders? and managers? interests as targeted and its effects on firm financial performance. Furthermore, the study tries to imply how this effect changes related to the different magnitudes of stock option compensation. In the last part, this effect is analyzed whether it has a link to the global financial crisis which is obviously related to the managers? extreme risk seeking behaviour especially in financial sector. In this study, 189 firms from the S&P index are analyzed with the panel data method between years 1998-2009. Additionally, regression method is used to compare each year. The data set is grouped as financial and non financial sector to present the effects of global financial crisis better. According to the results of this study, stock option compensation is positively related to investment magnitudes which are taken as the indicators of risk taking behaviour and it is negatively related to firm financial performance. The bigger magnitudes of the stock option compensation is founded to be related to bigger investment magnitudes in some types of investments and it is related to negative financial performance. According to the results of the comparison of the years, in financial sector the invesment magnitudes are bigger than the non financial sector just two years before the financial crisis and net cash flow from the investing activities is significantly negative when compared with non financial sector. Since therefore it is aimed to find the relation between the extreme risk seeking behavior and the incentive compensation structures.