The Timing of CEO Stock Option Grants: Scheduled Versus Unscheduled Awards

42 Pages Posted: 7 Apr 2005

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Guojin Gong

Penn State University - Smeal College of Business

Haidan Li

Santa Clara University - Leavey School of Business

Date Written: March 1, 2005

Abstract

This study seeks to provide insights into companies' decisions to issue stock options to CEOs on a scheduled or an unscheduled basis. We first document that unscheduled option awards provide CEOs with greater flexibility to influence the grant date stock price that leads to a lower exercise price of options and a higher accreted value realized at exercise. We then investigate whether the choice between unscheduled and scheduled awards is affected by the degree of CEO influence and the importance of stock options in CEO compensation. Consistent with expectations, we find that firms with greater CEO influence over compensation committees and boards and firms with greater use of stock options in CEO compensation are more likely to issue options to CEOs on an unscheduled basis. We also examine whether compensation committees and boards are effective in limiting CEOs' option timing manipulation for unscheduled awards and information timing manipulation for scheduled option awards. We find that, for firms that issue unscheduled options, boards that are less independent of management and that receive a greater proportion of director compensation from stock options allow greater management opportunism with respect to the timing of option awards. In contrast, for firms that issue scheduled options, we find no significant impact of board independence and director option compensation on the extent of management opportunism with respect to the timing of information releases around option awards.

Keywords: CEO stock option awards, CEO influence, corporate governance

JEL Classification: G34, J33, G39, M41

Suggested Citation

Collins, Daniel W. and Gong, Guojin and Li, Haidan, The Timing of CEO Stock Option Grants: Scheduled Versus Unscheduled Awards (March 1, 2005). Available at SSRN: https://ssrn.com/abstract=696982 or http://dx.doi.org/10.2139/ssrn.696982

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Haidan Li (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

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