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Right on Schedule: CEO Option Grants and Opportunism

Author

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

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.

Suggested Citation

  • Daines, Robert M. & McQueen, Grant R. & Schonlau, Robert J., 2018. "Right on Schedule: CEO Option Grants and Opportunism," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(3), pages 1025-1058, June.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:03:p:1025-1058_00
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    Cited by:

    1. Lou, Zhukun & Wang, Chong & Liu, Yaxin & Xu, Jing, 2023. "It takes two to tango: Impact of salary co-movement between top executives and ordinary employees on corporate innovation," Finance Research Letters, Elsevier, vol. 55(PB).
    2. Alex Edmans & Luis Goncalves-Pinto & Moqi Groen-Xu & Yanbo Wang, 2018. "Strategic News Releases in Equity Vesting Months," The Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4099-4141.
    3. Guthrie, Graeme & Stannard, Tom, 2020. "Easy money? Managerial power and the option backdating game revisited," Journal of Banking & Finance, Elsevier, vol. 118(C).
    4. Cheng, Lin & Jin, Qinglu & Ma, Hui, 2023. "Tone emphasis and insider trading," Journal of Corporate Finance, Elsevier, vol. 80(C).

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