The Dating Game: Do Managers Designate Option Grant Dates to Increase their Compensation?

Abstract:     
We provide evidence of a dating game that entails picking a grant date ex-post, i.e., after the board's compensation decision is made. We suggest two variants of the dating game. Back-dating (picking a date in the past with a lower stock price compared to board decision date) if the stock price has been rising prior to the board date, and forward-dating (waiting after the board decision date to observe the stock price behavior) if the stock price has been falling prior to the board date. Using a database of 638,757, option grant filings by insiders between August 29, 2002, and December 31, 2004 we find evidence consistent with both types of dating games. Specifically, we find stock price behavior around the grant date to be positively related to reporting lag, consistent with back-dating. In the promptly reported sample, we find stock return behavior around the grant date and the pattern of reporting lags consistent with forward-dating. Our calculations show that managers can obtain economically significant benefits by playing the dating game.

Keywords: Executive stock options, executive compensation, corporate governance, back-dating

JEL Classifications: G34, G38, K22

Working Paper Series