Timing Corporate Disclosures to Maximize Performance-Based Remuneration: A Case of Misaligned Incentives?

Abstract

Timing of stock option grants has become a significant corporate governance issue, in the light of the SEC's on-going inquiry into back-dating of stock options.

In this article, we examine the general problem of misalignment of interests arising from managerial discretion as to the timing and content of corporate disclosures in the context of performance-based compensation. We consider, and assess from a legal perspective, several empirical studies, which strongly suggest that CEOs are manipulating disclosure in such a way as to increase their own compensation. We argue that all but the most egregious forms of disclosure manipulation by management are either legally permissible or effectively insulated from legal redress.

The article then examines the underlying rationales for the existence of broad managerial discretion over timing of disclosure under securities laws, and the extent to which possible misalignment of interests in the area of disclosure timing and performance-based pay can be reduced by governance mechanisms, such as improved board monitoring, structural changes to performance-based pay or enhanced enforcement of securities laws. We conclude that although each governance mechanism has a role to play, no single mechanism is likely to be a governance panacea.

Keywords: Timing, stock options, options, disclosure, CEO compensation, executive remuneration, performance-based pay, insider trading

JEL Classification: G30, G34, G38, J33, K22, K33, K40, M52, 016