Right on Schedule: CEO Option Grants and Opportunism

54 Pages Posted: 5 Dec 2013 Last revised: 2 Feb 2016

See all articles by Robert Daines

Robert Daines

Stanford Graduate School of Business; Stanford Law School; European Corporate Governance Institute (ECGI)

Grant Richard McQueen

Brigham Young University - Department of Business Management

Robert J. Schonlau

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: January 27, 2016

Abstract

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

Daines, Robert and Daines, Robert and McQueen, Grant R. and Schonlau, Robert J., Right on Schedule: CEO Option Grants and Opportunism (January 27, 2016). Available at SSRN: https://ssrn.com/abstract=2363148 or http://dx.doi.org/10.2139/ssrn.2363148

Robert Daines

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-736-2684 (Phone)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Grant R. McQueen

Brigham Young University - Department of Business Management ( email )

TNRB 636
Provo, UT 84602
United States
801-422-3017 (Phone)

Robert J. Schonlau (Contact Author)

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States
9704916280 (Phone)
80523 (Fax)

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