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This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward. The return pattern has intensified over time, suggesting that executives have gradually become more effective at timing awards to their advantage, and possibly explaining why the results in this study differ from those in past studies. Moreover, I document that the predicted returns are abnormally low before the awards and abnormally high afterward. Unless executives possess an extraordinary ability to forecast the future marketwide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.
Key words: CEO stock option awards; timing
History: Accepted by David Hsieh, finance; received February 24, 2004. This paper was with the author 1 ½ months for 1 revision.
1. Introduction
Stock options are generally granted with a fixed exercise price equal to the stock price on the award date. If executives can influence the timing of a grant, they might therefore time it to occur (i) after an anticipated future stock price decrease, (ii) after a recent price decrease that they perceive to be unwarranted by fundamentals (in which case the price would gradually increase in the future), or (iii) before an anticipated stock price increase. In any of these cases, self-serving behavior by executives should manifest itself in stock price decreases before stock option grants and/or stock price increases afterward.
Yermack (1997) examines the stock returns around 620 stock option awards to CEOs between 1992 and 1994. While the stock returns leading up to the award dates are normal, the stock returns during the 50 trading days afterward exceed those of the market by more than 2%. He interprets these results as evidence that executives opportunistically time awards to occur before anticipated stock price increases. Aboody and Kasznik (2000) investigate a sample of 2,039 scheduled option awards to CEOs between 1992 and 1996. They focus on scheduled awards to remove the possibility that the results are attributable to opportunistic timing of the awards. The abnormal returns before scheduled awards are statistically indistinguishable from zero, while the abnormal returns during the subsequent 30 days are almost 2% and statistically different from zero. They interpret these findings to suggest that executives opportunistically time...