Right on Schedule:CEO Option Grants and Opportunism

Three distinguished professors (Robert M. Daines of the Stanford Law School, Stanford University, Grant R. McQeen and Robert J. Schonlau who are both professors in the Marriott School, Department of Finance, Brigham Young University) wrote a research paper (Right on Schedule CEO Option Grants and Opportunism) on whether or not CEOs will behave in an opportunistic fashion in order to maximize the compensation derived from stock options. More particularly, even though stock options are now granted on a scheduled date (to avoid all of the issues that arose on backdating the options that were dealt with by the SEC in 2006), do CEOs that know the dates of upcoming stock grants temporarily depress stock prices before the grant dates to obtain options with lower stock prices. This is part of the continuing debate as to whether senior executives extract too much value out of corporations for themselves to the detriment of shareholders.

Their paper provides considerable detail on the methodology employed to test their hypotheses, but their thoughts and conclusions are important for my purpose here. The bottom line is that the research confirms that CEOs are still involved in efforts to increase the value of their stock options by using the power vested in them as the senior corporation officers. Notwithstanding the changes in United States securities regulation aimed at eliminating this gaming of the system it appears to go on.

The problem with the research is that in the end of the day, it is still only anecdotal information. It points to an issue, but provides no hard evidence that this is actually going on. Regardless you would have thought that this would give regulators cause to dig further. It is not apparent that this is the case. Much like insider trading, this represents a plague on capital markets. The market continues to be tilted towards the benefit of insiders that can use information to decrease or increase the value of the stock to their benefit, probably without really effecting the long term trajectory of the company’s stock. But who knows.

There would appear to be nothing anyone can practically do bout this other than monitor stock price activity around option dates It would seem that the SEC has the tools available to it. All that is necessary is to monitor a sample of corporations to review the trends and patterns.

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