5 Pages Posted: 21 Oct 2008
The case provides stock returns, risk-free rates, and market returns associated with stock option grants issued from 1993 to 2004. The returns are 20-trading-day returns subsequent to the grant date. The grants are categorized as scheduled or unscheduled. Grants that could not be classified as either are not included in the data. The case also explains the efficient market hypothesis and its implications with respect to excess returns associated with the stock granting status (scheduled vs. unscheduled). The students are expected to use the data to test for the presence of excess returns...and use the results to make inferences about the granter's ability to select grant dates in order to generate excess returns.
Rev. Apr. 23, 2013
Proponents of the efficient market hypothesis (EMH) believe there is no way for investors to achieve excess returns using only publicly available information. If the market is efficient, excess returns are only possible if the investor trades on insider information. Although insider trading is illegal, the strategic timing of the issuing of stock option grants is not. This leads to the important question of whether stock option grants result in excess returns due to the strategic timing of either the issuance of the option grant or the release of information about firm performance. The amount of excess returns achieved is a measure of the value of inside information.
Although market professionals use the term option to refer to a wide variety of financial instruments, we will use the term stock option or option to refer to the simplest of all options. For our purposes, a stock option gives the owner the right, but not the obligation, to purchase a share of a specific stock at a fixed price on a future date. The price at which the investor may purchase the stock is called the strike price. The strike price is usually set to the market price of the stock on the day the option is granted. Not surprisingly, the day the option is granted is called the grant date. The date after which the investor may choose to purchase the stock is the vesting date. The maturity date is the last date upon which the option can be exercised.
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Keywords: data analysis, efficient markets
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