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Right on Schedule: CEO Option Grants and Opportunism

  • Robert M. Daines, Grant R. McQueen and Robert J. Schonlau

After the public outcry over backdating, many firms began scheduling option grants. This eliminates backdating but creates other agency problems: Chief executive officers (CEOs) aware of upcoming option grants have an incentive to temporarily depress stock prices to obtain lower strike prices. We show that some CEOs have manipulated stock prices to increase option compensation, documenting negative abnormal returns before scheduled option grants and positive abnormal returns afterward. These returns are explained by measures of CEOs’ incentives and ability to influence stock prices. We document several mechanisms used to lower stock price, including changing the substance and timing of disclosures.

Corresponding author
* Daines (corresponding author),, Stanford University; McQueen,, Schonlau,, Brigham Young University Marriott School of Business.
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We appreciate helpful comments from an anonymous referee, Yakov Amihud, Louca Christodoulos, Jeff Coles, Michael Drake, Jarrad Harford (the editor), William Hubbard, Dirk Jenter, Wei Jiang, Marcel Kahan, Steven Kaplan, Jonathan Karpoff, Ron Kasznik, Mike Klausner, Dave Larcker, Erik Lie, Allan McCall, Todd Mitton, Brennan Platt, Ryan Pratt, and David Yermack, as well as seminar participants at Brigham Young University, University of Chicago, Columbia University, Harvard University, Northwestern University, New York University, Stanford University, Yale University, the 2013 American Law and Economics Association conference, and the 2014 European Financial Management Association conference. McQueen received financial support from the William Edwards Professorship. We acknowledge the Brigham Young University Silver Fund and Whitmore Global Management Center, and Stanford University’s Rock Center for Corporate Governance, which paid for databases and research support.

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