Shannon Rodel | February 11, 2019
Some CEOs are profiting from releasing more negative news releases leading up to their executive stock option grant date, according to new research from the University of Notre Dame.
The move depresses the stock price and lowers the guaranteed “strike price,” which allows the CEO to exercise their stock option to buy a specified number of shares below market value. Should the stock price go up, the executive can then sell the shares at market price and keep the difference as profit.
“Unintended Consequences: Information Releases and CEO Stock Option Grants,” forthcoming in the Academy of Management Journal by Tim Hubbard, assistant professor of management in Notre Dame’s Mendoza College of Business, finds that the stock prices are significantly lower than expected during these periods, leading to major gains for CEOs — between $143,500 and $839,000, depending on the assumptions.
The study looked at option grants of U.S. publicly traded companies from 2009 to 2013, examining the cumulative abnormal returns before option grant dates. The researchers collected all news releases from each firm during the period and used this data to understand whether firms release more negative news releases in this time frame and the type of negative news.
How to compensate CEOs in a way that encourages them to act in the best interest of their firms has been the topic of much research and regulation. Still, problems remain. For example, the options backdating scandal, with cases first emerging in 2006, ensnared dozens of executives over allegations that the dates of stock-option awards had been manipulated to enrich recipients.
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