Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Cornell University - Samuel Curtis Johnson Graduate School of Management
INSEAD - Finance
Journal of Finance, 2010 (published as "Lucky CEOs and Lucky Directors")
Harvard Law and Economics Discussion Paper No. 566
The analysis of this paper was subsequently combined with that of our companion paper “Lucky Directors,” http://ssrn.com/abstract=952239. The combined paper, titled “Lucky CEOs and Lucky Directors,” is available on SSRN at http://ssrn.com/abstract=1405316 and was published at Journal of Finance, Vol. 65, No. 6, pp. 2363-2401, 2010.
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.
Because our analysis suggests that the existence of lucky CEO grants is a variable that can be useful to research studying firms’ governance and decision-making, we make available on the website of the Harvard Program on Corporate Governance a dataset of CEO luck indicators based on our work.
Number of Pages in PDF File: 49
Keywords: Executive compensation, corporate governance, options, backdating, spring-loading, inside information, CEO, independent directors
JEL Classification: D23, G32, G38, J33, J44, K22, M14Accepted Paper Series
Date posted: November 20, 2006 ; Last revised: December 9, 2010
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