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Lucky CEOs

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  • Lucian A. Bebchuk
  • Yaniv Grinstein
  • Urs Peyer

Abstract

We study the relation between corporate governance and opportunistic timing of CEO option grants via backdating or otherwise. Our methodology focuses on how grant date prices rank within the price distribution of the grant month. During 1996-2005, about 12% of firms provided one or more lucky grant -- defined as grants given at the lowest price of the month -- due to opportunistic timing. Lucky grants were more likely when the board did not have a majority of independent directors and/or the CEO had longer tenure -- factors associated with increased influence of the CEO on pay-setting. We find no evidence that gains from manipulated grants served as a substitute for compensation paid through other sources; total reported compensation from such sources was higher in firms providing lucky grants. Finally, opportunistic timing has been widespread throughout the economy, with a significant presence in each of the economy's twelve (Fama-French) industries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12771.

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Date of creation: Dec 2006
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Publication status: published as Bebchuk, Lucian, Yaniv Grinstein, and Urs Peyer. “Lucky CEOs and Lucky Directors." Journal of Finance 65, 6 (2010): 2363-2401.
Handle: RePEc:nbr:nberwo:12771

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References

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  1. Murphy, Kevin J., 2003. "Stock-based pay in new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 129-147, January.
  2. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
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  4. Jarrad Harford & Kai Li, 2007. "Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs," Journal of Finance, American Finance Association, vol. 62(2), pages 917-949, 04.
  5. Holderness, Clifford G. & Sheehan, Dennis P., 1988. "The role of majority shareholders in publicly held corporations : An exploratory analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 317-346, January.
  6. Chauvin, Keith W. & Shenoy, Catherine, 2001. "Stock price decreases prior to executive stock option grants," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 53-76, March.
  7. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
  8. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  9. Cotter, James F. & Shivdasani, Anil & Zenner, Marc, 1997. "Do independent directors enhance target shareholder wealth during tender offers?," Journal of Financial Economics, Elsevier, vol. 43(2), pages 195-218, February.
  10. Del Guercio, Diane & Dann, Larry Y. & Partch, M. Megan, 2003. "Governance and boards of directors in closed-end investment companies," Journal of Financial Economics, Elsevier, vol. 69(1), pages 111-152, July.
  11. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
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Cited by:
  1. Carow, Kenneth & Heron, Randall & Lie, Erik & Neal, Robert, 2009. "Option grant backdating investigations and capital market discipline," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 562-572, December.
  2. Minnick, Kristina, 2011. "The role of corporate governance in the write-off decision," Review of Financial Economics, Elsevier, vol. 20(4), pages 130-145.
  3. Arikawa, Yasuhiro & Mitsusada, Yosuke, 2011. "The adoption of poison pills and managerial entrenchment: Evidence from Japan," Japan and the World Economy, Elsevier, vol. 23(1), pages 63-77, January.
  4. Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky Directors," NBER Working Papers 12811, National Bureau of Economic Research, Inc.

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