Is it Timing of the Date, of the News or is it Backdating of Option Grants?

Abstract

This study investigates executive stock option grants at the Amsterdam stock exchange. The motive for this study is to examine the timing of the date and the news around option grants, and whether the option grant date is backdated. The empirical results provide evidence that that there are no significant abnormal cumulative returns in the period before the option grant date. However, we find significant abnormal cumulative returns during a period of 30 trading days after the option grant date, even for scheduled options granted before September 1, 2002. In addition, we have formed four different sub-samples: scheduled and unscheduled option grants, and, accounting for a change of the rulings as of September 1st, 2002 options granted before and after the latter date. Significant differences in the means of abnormal returns of the various sub samples are observed. These disappear for scheduled option grants after September 2002, but not for unscheduled option grants. The regression estimates for the periods before and after the introduction of stricter rulings in 2002 are consistent with our findings from the t-tests. The regressions run provide not only evidence that the option grants are timed, but also that the option grants are retroactively backdated. In addition, our findings show that earnings news releases around option grant dates are managed. Our findings are consistent with timing of news being a substitute for backdating and timing of the option grant date. Although after September 2002 stricter rulings regarding the option grant date reduce the opportunities to exploit private information, they do not disappear completely, notwithstanding the requirement of immediately publishing the option grants.