Earnings Management Prior to Stock Option Grants
20 Pages Posted: 21 May 2003
Date Written: January 2003
This paper examines earnings management prior to stock option grants. Because the gain realized from a stock option is dependent on the difference between the exercise price determined on the stock option grant date and market price on the exercise date, management has the incentive to temporarily depress its share price immediately prior to the grant date (Yermack, 1997; Chauvin and Shenoy, 2001). This paper focuses on earnings management to decrease the exercise price prior to the stock option grants. Our results support this hypothesis, as we find a negative relation between discretionary accruals and subsequent stock option grants.
Keywords: earnings management, discretionary accruals, stock option grants
JEL Classification: M41, M43, J33
Suggested Citation: Suggested Citation