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Investors often refer to this as the grant or strike price.Employees do not have any stock ownership benefits, such as voting rights, until they exercise their option to purchase shares.SEC investigations, lawsuits, terminations, and even criminal prosecutions followed in the great stock option backdating scandal.(All this occurred before the current deadline for filing Form 4s, which made backdating possible.) The number of executives and board members who seemed to think that backdating was okay was truly astounding.Now, another academic research study, Right on Schedule: CEO Option Grants and Opportunism (previously discussed in the ), suggests that companies (the authors blame the CEO) may be releasing negative information before an option grant (“bullet-dodging”) or holding back positive information until after the grant (“spring-loading”).The move to scheduled options solved some problems but created others.Only after the employee exercises his option to purchase shares does he have the right to vote as a corporate shareholder as well as the right to buy, sell and transfer his shares.Each company is different regarding its stock option vesting periods.
The first hint that a problem existed in this area was an academic study finding that many public companies seemed to be prescient enough to award stock options on the day the company’s stock price hit its low for the year, and strongly suggesting that this was much more than mere coincidence.
When a company adopts an annual schedule for option grants, there is a given date (known in advance) when the CEO is personally better off if the firm’s stock price is temporarily low.
We find evidence that some executives respond to this perverse incentive: Firms’ stock prices tend to be temporarily low on the grant date.
Our identification strategies rule out plausible alternative explanations for these abnormal returns.
The data appears to show that, at the companies in question, share prices tend to decline in the 90 days before grant and then rebound afterward much more than at comparable companies during the same period. The SEC’s complete overall of its proxy reporting rules, which occurred a few years late and included the CD&A requirement, suggested that companies disclose in their proxy statements whether they attempt to “time” the award of options to occur before or after the release of news to the market.