Stock Option Schedules and Managerial Opportunism

55 Pages Posted: 17 Mar 2014

See all articles by Linxiao Liu

Linxiao Liu

State University of West Georgia

Harrison Liu

University of Texas at San Antonio - Department of Accounting

Jennifer Yin

University of Texas at San Antonio

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2014

Abstract

This study investigates some of the most important avenues that mangers use to manipulate the value of stock option grants. It also compares the use of these avenues in firms that issue scheduled options and in firms that issue irregular options. We document that before Sarbanes-Oxley Act (SOX), cumulative abnormal returns were significantly negative in the 30-day window before an option grant, but cumulative abnormal returns turned significantly positive after the option grant. This pattern is more pronounced for irregular options, and the evidence supports that opportunistic manipulation of strike prices by CEOs maximized the value of the option grants. We find the disclosure requirement of option grants included in SOX successfully curtails opportunistic behavior in firms that issue scheduled options, but it is less stopping opportunistic behavior in firms that issue irregular options. Firms granting irregular options take larger negative discretionary accruals in advance of the grant than firms that grant scheduled options, and the degree of downward earnings management increases with the size of the subsequent grant. We further show that firms are more likely to issue irregular options when they offer larger option grants, have a less independent board, receive less analyst coverage, have a new CEO, exhibit poor prior performance, have higher stock return volatility, and are smaller in size.

Keywords: stock option schedules, earnings management, executive compensation

Suggested Citation

Liu, Linxiao and Liu, Harrison and Yin, Jennifer, Stock Option Schedules and Managerial Opportunism (March 16, 2014). Available at SSRN: https://ssrn.com/abstract=2409955 or http://dx.doi.org/10.2139/ssrn.2409955

Linxiao Liu

State University of West Georgia ( email )

1601 Maple St
Carrollton, GA 30118
United States

Harrison Liu

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Jennifer Yin (Contact Author)

University of Texas at San Antonio ( email )

Department of Accounting
San Antonio, TX 78249
United States
210-458-7090 (Phone)
210-458-4322 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
94
Abstract Views
1,090
rank
280,870
PlumX Metrics