Lucky Directors

Abstract:     
While prior work has focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% of director grant events were lucky grant events falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. Director grant events were preceded by negative abnormal returns and followed by positive abnormal returns. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. We also find that director grant events were more likely to be lucky when the potential gains from such luck were larger, when the firm had more entrenching provisions protecting insiders from the risk of removal, and when the board did not have a majority of independent directors.

The analysis of this paper was subsequently combined with that of our companion paper “Lucky CEOs,” http://ssrn.com/abstract=945392, 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, stock options, backdating, spring loading, inside information, CEO, independent directors, outside directors, entrenchment

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

Working Paper Series