Graduation Year


Date of Submission


Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts



Reader 1

Andrew Finley

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Compensating executives with stock options creates incentives for executives and aligns their goals with shareholders. When examining specific components of equity-based compensation, stock options have a larger incentive effect on executives compared to stock awards as options are priced as a function of stock volatility. Since the option incentive effect is more profound than the stock incentive effect, executives may take on more risk. The relationship between firm risk and litigation can be demonstrated by the pricing of directors’ and officers’ liability insurance, which protects them from the costs of litigation. The purpose of this study is to examine the mix of executive stock options to total stock-based compensation and its effect on firms’ litigation risk, specifically looking at firms’ CEOs. I find evidence that rejects my hypothesis; a larger mix of options to stock-based compensation is associated with lower risk of litigation; the relationship is not significant in all tests.