The Effect of the Sarbanes-Oxley Act on the Timing Manipulation of CEO Stock Option Awards

39 Pages Posted: 21 Nov 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: November 16, 2005

Abstract

Section 403 of the Sarbanes-Oxley Act accelerates the reporting deadline of executive stock option grants to be within two business days after the grants. This study investigates the effect of Section 403 on the extent of CEO influence over grant date stock prices aimed at enhancing the value of executive stock option awards. Prior studies find that executives affect the exercise price of options by influencing the timing of option awards, manipulating the timing of value-relevant information around option awards, or backdating the award in an attempt to lower the grant date stock price, thereby increasing the value of their options. We find that the accelerated reporting requirement of SOX 403 significantly reduces CEO influence over grant date stock prices in the post-SOX period. Specifically, we find that the accelerated reporting requirement (1) deters the opportunistic granting of unscheduled awards after bad news announcements and reduces, but does not eliminate, the opportunistic granting of unscheduled awards before good news announcements; (2) deters the delaying of good news announcements after scheduled option awards; and (3) greatly reduces the apparent use of backdating of option grants to lower the strike price. Thus, we provide important new evidence on the economic impact of SOX on mitigating executive opportunistic behavior associated with stock option grants.

Keywords: Executive stock option awards, Sarbanes-Oxley Act, Timing manipulation

JEL Classification: J33, M41, G34, G38

Suggested Citation

Collins, Daniel W. and Gong, Guojin and Li, Haidan, The Effect of the Sarbanes-Oxley Act on the Timing Manipulation of CEO Stock Option Awards (November 16, 2005). Available at SSRN: https://ssrn.com/abstract=850564 or http://dx.doi.org/10.2139/ssrn.850564

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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