Lucky CEOs

Abstract:     
We study the relation between corporate governance and opportunistic timing of CEO option grants. Investigating the incidence of lucky grants - defined as grants given at the lowest price of the month - we estimate that about 1,150 lucky grants resulted from opportunistic timing, and that 12% of firms provided one or more lucky grant due to opportunistic timing during the period 1996-2005. We find no evidence that opportunistically timed grants served as a substitute for other forms of compensation; indeed, total reported compensation from other sources was higher (relative to peer companies) in firms providing lucky grants. For any given CEO with two or more grants, grants were more likely to be lucky when they took place in months in which the potential payoffs from opportunistic timing were relatively high. Grants were also more likely when the company did not have a majority of independent directors on the board and/or the CEO had longer tenure, both factors that are associated with increased influence of the CEO on pay-setting and board decision-making. Luck was persistent, with a CEO's chance of getting a lucky grant increasing when a preceding grant was lucky as well. Finally, we find that opportunistic timing was present in each of the economy's 12 (Fama-French) industries, and we do not find evidence that it was significantly driven by industry norms and culture.

The analysis of this paper was subsequently combined with that of our companion paper “Lucky Directors,” http://ssrn.com/abstract=952239, and the combined and further developed analysis will be published in the Journal of Finance under the title “Lucky CEOs and Lucky Directors.” The combined paper is available on SSRN at: http://ssrn.com/abstract=1405316

Keywords: Executive compensation, corporate governance, options, backdating, spring-loading, inside information, CEO, independent directors

JEL Classifications: D23, G32, G38, J33, J44, K22, M14

Accepted Paper Series