Right on Schedule: CEO Option Grants and Opportunism

Robert M. Daines, Grant R. McQueen and Robert J. Schonlau

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 3, 1025-1058

Abstract: After the public outcry over backdating, many firms began scheduling option grants. This eliminates backdating but creates other agency problems: Chief executive officers (CEOs) aware of upcoming option grants have an incentive to temporarily depress stock prices to obtain lower strike prices. We show that some CEOs have manipulated stock prices to increase option compensation, documenting negative abnormal returns before scheduled option grants and positive abnormal returns afterward. These returns are explained by measures of CEOs’ incentives and ability to influence stock prices. We document several mechanisms used to lower stock price, including changing the substance and timing of disclosures.

Date: 2018
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