This paper examines the relationship between executive stock options (ESOs) and risk-taking behavior in oil and gas companies. The authors use a simultaneous equations approach to analyze whether the sensitivity of CEO stock options to stock return volatility (ESO risk incentives) is positively associated with future exploration risk. They find that ESO risk incentives are positively related to future exploration risk, suggesting that ESOs provide incentives for managers to increase firm risk. Additionally, they find that ESO risk incentives are negatively related to oil price hedging, further supporting the idea that ESOs encourage risk-taking. The study is among the first to document a direct link between ESO risk incentives and variance-increasing investments, while explicitly recognizing that these incentives are endogenously determined. The findings suggest that ESOs can mitigate risk-related incentive problems by motivating managers to take on more risky projects.This paper examines the relationship between executive stock options (ESOs) and risk-taking behavior in oil and gas companies. The authors use a simultaneous equations approach to analyze whether the sensitivity of CEO stock options to stock return volatility (ESO risk incentives) is positively associated with future exploration risk. They find that ESO risk incentives are positively related to future exploration risk, suggesting that ESOs provide incentives for managers to increase firm risk. Additionally, they find that ESO risk incentives are negatively related to oil price hedging, further supporting the idea that ESOs encourage risk-taking. The study is among the first to document a direct link between ESO risk incentives and variance-increasing investments, while explicitly recognizing that these incentives are endogenously determined. The findings suggest that ESOs can mitigate risk-related incentive problems by motivating managers to take on more risky projects.