Do Managers Influence their Pay? Evidence from Stock Price Reversals Around Executive Option Grants
M. P. Narayanan
University of Michigan - Stephen M. Ross School of Business
H. Nejat Seyhun
University of Michigan at Ann Arbor - Stephen M. Ross School of Business
Ross School of Business Paper No. 927
Using a database of 605,106 option grant filings by insiders between 1992 and 2002, we find significant abnormal stock return reversals around the grant date. Consistent with the hypothesis that managers influence their pay, the reversals are positively related to grant size and the seniority of the manager, and negatively related to the firm size. The reversals are also more pronounced for grants that are not awarded on a regular schedule. The returns following the grant date are negatively correlated to the returns prior to the grant date, indicating that some firms are attempting to influence the grant date stock price by more than just timing the grant date or timing information releases around the grant date. We find that the extent of reversals are positively related to the magnitude of the time interval between the grant date and the date the grants are reported to the SEC, suggesting that some firms are setting the grant date on a back-date basis, i.e., picking a date in the past with a lower stock price compared to that on the decision date.
Number of Pages in PDF File: 55
Keywords: Stock options, executive compensation, corporate governance, agency
JEL Classification: G34, G38, K22working papers series
Date posted: January 17, 2005
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