Impact of CEO stock options on corporate innovation: evidence from U.S. public firms

In the context of an increasingly complex competitive landscape, the enhancement of innovation capabilities through the implementation of effective incentive mechanisms has emerged as a pivotal concern for enterprises. This study utilizes a sample of U.S. publicly listed companies from 1992 to 2021 to empirically investigate the influence of Chief Executive Officer (CEO) option incentives on corporate innovation capacity. The findings reveal that an increased proportion of CEO option compensation relative to total compensation significantly correlates with a rise in the number of patent applications filed by firms, thereby indicating that option incentives can effectively stimulate corporate innovation. Moreover, the impact of option incentives demonstrates heterogeneity. In growth-stage enterprises, characterized by high sales growth rates, option incentives exhibit a more pronounced facilitative effect on innovation. This observation aligns with the resource constraints, elevated growth expectations, and strategic imperatives inherent to growth-stage firms. Additionally, firms led by male CEOs experience a stronger innovation-promoting effect from option incentives, which is consistent with the generally higher risk-taking propensity observed among male executives. The risk compensation mechanism inherent in option incentives is more efficacious in amplifying the innovation drive of such managers. This study provides empirical evidence that can inform the design of effective incentive mechanisms, thereby assisting enterprises in optimizing incentive strategies, enhancing innovation capabilities, and sustaining competitive advantages across varying developmental stages and managerial backgrounds in a dynamic market environment.