Right on Schedule: CEO Option Grants and Opportunism
54 Pages Posted: 5 Dec 2013 Last revised: 2 Feb 2016
Date Written: January 27, 2016
In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures.
Keywords: Executive compensation, Stock options, Corporate governance, CEO pay, Option backdating, Stock price manipulation
JEL Classification: G30, D82, J33, K22, M52, M41
Suggested Citation: Suggested Citation