Option Grants Research Articles

Why do insiders sell stocks after receiving options?

ABSTRACT We investigate corporate insiders’ trading behaviour around option grants and find that they substantially increase their net sales after receiving options. The increase in insider net sales is positively associated with risk metrics such as idiosyncratic volatility and stock price crash risk, but not with proxies for insider opportunism. This suggests that the increase in net sales is likely driven by risk-reduction considerations rather than opportunistic trading based on inside information. Consistent with this view, we find that insider sales following option grants do not precede more negative returns.

WITHDRAWN: Rank-and-file employee stock options and audit pricing: Evidence from S&P 1500 firms

In this study, we examine the impact of rank-and-file employee stock options on audit fees. We document compelling evidence that option grants to rank-and-file employees are positively related to audit fees. Further analyses show that this positive relation is more pronounced when a firm's real earnings manipulation risk is higher and when rank-and-file employees are more sensitive to monetary incentives. We also find that options granted to rank-and-file employees are positively related to audit efforts. The evidence suggests that auditors perceive options to rank-and-file employees to be associated with increased audit risk.

Neurosurgical and pharmacological management of dystonia.

Dystonia characterizes a group of neurological movement disorders characterized by abnormal muscle movements, often with repetitive or sustained contraction resulting in abnormal posturing. Different types of dystonia present based on the affected body regions and play a prominent role in determining the potential efficacy of a given intervention. For most patients afflicted with these disorders, an exact cause is rarely identified, so treatment mainly focuses on symptomatic alleviation. Pharmacological agents, such as oral anticholinergic administration and botulinum toxin injection, play a major role in the initial treatment of patients. In more severe and/or refractory cases, focal areas for neurosurgical intervention are identified and targeted to improve quality of life. Deep brain stimulation (DBS) targets these anatomical locations to minimize dystonia symptoms. Surgical ablation procedures and peripheral denervation surgeries also offer potential treatment to patients who do not respond to DBS. These management options grant providers and patients the ability to weigh the benefits and risks for each individual patient profile. This review article explores these pharmacological and neurosurgical management modalities for dystonia, providing a comprehensive assessment of each of their benefits and shortcomings.

Time Series Variation in the Efficacy of Executive Risk-Taking Incentives: The Role of Market-Wide Uncertainty

ABSTRACT Boards of directors encourage risk-averse managers to take risky actions by providing stock options and severance pay. We demonstrate that the ability of these incentives to encourage risk-taking hinges on the level of uncertainty facing the manager. We confirm prior findings that stock option convexity encourages risk-taking but find that this relation only holds when market-wide uncertainty is low. We also confirm prior findings that severance pay encourages risk-taking but find that this relation only holds during high market-wide uncertainty and negative market-wide performance. Finally, we find that compensation committees respond to variation in uncertainty by adjusting the level of option grants. Our results suggest that the effectiveness of incentives to take risk varies with the market-wide uncertainty, and that boards consider this in annual compensation design. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G30; G34; K22; M40; M46.

Option compensation, dynamic investment and capital structure

AbstractWe develop a dynamic trade‐off model of managerial discretion to investigate how stock option compensation relates to managers' intertwined capital structure and dynamic investment decisions. Our model predicts that option grants provide managers with incentives to undertake both current and future investments, in sharp contrast to the effects of stock compensation. With an increase in option compensation, managers in low‐ (high‐) risk firms tend to increase (decrease) firm leverage, while the opposite is true when stock pay increases. This result offers an innovative prospective on the empirical tests of the relationship between option compensation and capital structure.

Black-Scholes Model and Binomial Model Tests on Nvidia Stock Option Contracts

In order to invest, investors can purchase a number of shares. The characteristics of stocks are high risk/high return and low risk/low return. Stock price volatility is a measurement of how quickly and in a short period of time stock prices can rise or fall (fluctuate). With the advent of derivative instruments, specifically options, risk can be reduced in several ways. A contract known as an option grants its owner the right, but not the duty, to sell or acquire a specific quantity of the underlying asset at a specified price at a specific point in the future. Methods for calculating option prices in derivative instruments is the Binomial option model and the Black Scholes option model. The aim of this research to determine the accuracy of the Black Scholes compared with the Binomial in predicting call option shares of Nvidia Coorporation (NVDA) on the due date of 1 month, 2 months, and 3 months, using data price daily and call option which at 17 sample from January 2022 to May 2023. To determine the accuracy use price absolute error comparisson between the Black Scholes and the Binomial was conducted. In result the Black Scholes model is more accurate than the Binomial.

When Myopic Managers Must Mark to Market

Although prior research suggests strict, fair value–based securities accounting rules cause banks to sell securities into negative liquidity shocks, a value-destroying behavior called “liquidity feedback trading,” the mechanism is uncertain. We find the sooner chief executive officers (CEOs) are permitted to cash out of their stock and option grants, the more prone are their banks to feedback trading. Furthermore, the sooner CEOs can cash out, the more positive their banks’ stock price reaction to news of accounting rule relaxation. We conclude incentives for managerial short-term focus are a mechanism by which stricter accounting rules cause feedback trading. We also find evidence that regulatory compliance concerns play a role. This paper was accepted by Tomasz Piskorski, finance. Funding: A. Kolasinski is grateful for financial support from Mays Business School at Texas A&M University. N. Yang thanks the School of Accounting and Finance at The Hong Kong Polytechnic University for financial support. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2020.03249 .

CEO equity incentive duration and expected crash risk

This study examines the effect of CEO equity incentive duration on firm-specific ex ante crash risk. Using a measure that explicitly accounts for the length of stock and option grant vesting terms (Gopalan et al., 2014), we find that longer CEO equity incentive duration reduces investors' perceived crash risk, gauged by the steepness of option implied volatility smirk. This finding holds for alternative measures of duration that account for endogeneity, alternative regression specification with lagged independent variables and using an instrumental variable approach. We further find that this negative relation is more salient for firms whose CEOs have a higher level of career concerns and for firms with weaker external monitoring. Additional tests point to financial reporting obfuscation and over-investment as two possible channels through which the duration–crash risk relation operates. Overall, our results suggest that lengthening CEO equity incentive duration discourages managers from bad news hoarding and continuing negative NPV projects, which reduces a firm's expected crash risk.

Employee Stock Options, Political Connections and Regulation Change in Chinese Listed Firms

Motivated by the institutional setting and based on the extant literature, this paper investigates the effects of changes in the regulation of employee stock options (SO) and political connection (PC) on SO grants (size-SOP and value-SOM) and the moderating effects of changes in ESO regulations on the relationship between political connections and SO grants. Using the established measurements of stock option grants, political connection and stock option regulation change (REG), we analysed the final sample of 482 firm-year observations from 190 firms firm-year from 2006 to 2018, which obtained from Chinese listed firms. Empirical analysis by using pooled ordinary least squares(OLS) and Fixed Effect (EF) regression model with robust standard error used for analyzing the data. To mitigate the self-selection biases, we use the propensity score matching (PSM) method. To address the endogeneity (i.e. causality and/or simultaneity) issue as well as for the robustness test, we use 2SLS regression analysis with instrumental variables to check the validity of a moderating effect regulation change and PC on the relationship between PC and SOs granted (SOP and SOM). We find that the implement of SO regulations change has a negative effect on SO grants in terms of both size and value, while PC has a positive effect on SO grants. Change in the ESO regulations has negatively moderated the relationship between PC and ESO grants. This evidence suggests that PC lead to increase SO grants before the change in SO regulations but a tightening of ESO regulations inversely moderated that relationship and lead to a reduction in SO grants after 2009. PC firms granted significantly more and worthier stock options to their employees than unconnected firms, but that trend was attenuated after the reform.According results, this research provides crucial info to managers, market regulators and investors to be able to enrich effective stock option regulation process along with impact of PC on stock option in China. Our findings also have important insights for investors and firms, and policy implications for policy-makers and regulators.

Contingent convertible lease modeling and credit risk management

The main objective of this study is to determine a lease agreement to finance an investment project and a solution for managing credit risk. This study investigates three types of contingent leases to reduce the costs associated with bankruptcy and compensate for the lessor's position. A leasing defaultable contract allows the lessor to obtain the rent that will be recovered if the lessee defaults. A leasing convertible contract can be automatically converted into shares when certain default conditions related to the cash flows generated by the firm are met. These conditions are triggered by the ratio of the firm's value and leasing payments. A Defaultable-Convertible-Leasing contract with a payback option grants the lessor the right but not the obligation to convert the remaining lease payments into stocks or to break up the contract and pick up the rented equipment when the firm reaches the default threshold. These contracts are motivated by contributing to the range of risk-management strategies by adding more flexibility to standard leasing contracts and contingent rents. Closed-form securities pricing solutions are set forward in a dynamic model for firms with existing assets and a growth option financed by shares and a contingent lease. Risk-neutral pricing theory and the backward induction method are used to determine the pricing of corporate securities. Numerical analysis shows that leasing convertible contracts and defaultable-convertible contracts with payback options impact the service value of the leased asset, maturity, and inefficiencies resulting from insolvency and asset substitution. An optimal conversion rate reduces inefficiencies, thus making the leasing convertible contract and defaultable-convertible-leasing contract with payback option a reliable solution to ensure business continuity and loss coverage of the leasers upon default.

Should managers be incentivized with stock or options? Evidence from China

Which type of managerial compensation—stock or options—is more effective as an incentive to maximize shareholder value and curb excessive risk-taking has been debated often in the literature. By investigating the stock and option grants by Chinese firms from 2005 to 2015, we find that higher past stock return volatility increases the preference for stock over options, while a significant upward trend in stock price results in a tendency to choose options over stock. Both stock and option grants as forms of managerial compensation lead to better financial performance, with no significant difference. We present evidence to exclude earnings management as the source of improvement in financial performance. Firms using stock as compensation exhibit higher productivity than those using options. In contrast, there is no improvement in managerial ability from using either stock or options as compensation. Our study deepens the understanding of the relationship between the composition of managerial compensation and firm performance.

The Effect of Option Grants on Managerial Risk Taking: A Review

This article presents a systematic review of the theoretical and empirical literature on option grants and managerial risk taking. One of the objectives is the motivation of further research on the topic. Risk-averse managers hold less diversified portfolios and, thus, tend to take less risk than optimal for shareholders. More option grants may encourage risk taking and result in higher firm value or alternatively increase the sensitivity of wealth to stock-price fluctuations mitigating overall risk-taking incentives. The net effect of options on risk-taking behavior is, therefore, ambiguous and calls for more empirical investigation. This is crucial for fiscal policymaking and regulation reforms. Yet, establishing a causal link between option granting and managerial risk taking has been challenging due to reverse causality, omitted correlated variables and measurement errors. In this review, we revisit the VegaDelta question by synthesizing the relevant research in economics, finance and accounting. We find that the empirical literature has successfully utilized natural experiments (e.g., regulation changes) to better establish causality, even though some mixed results are also documented. Finally, we also emphasize potential future research avenues especially relating to accounting disclosure, earnings management and tax policy.

Changes in CEO stock option grants: A look at the numbers

We study changes in the number of CEO stock option grants. Despite some evidence of short-term rigidity, the number of options granted changes frequently over time. CEOs of firms with unusual investment patterns subsequently receive fewer stock options as part of their compensation packages. CEOs who hold exercisable deeply-in-the-money options (overconfident CEOs) also receive fewer stock options in subsequent periods. Our results show that past CEO behavior predicts stock option grants. These insights can inform theoretical discussion on option-granting behavior and, more broadly, on the board's re-contracting process.

Social capital and managerial opportunism: Evidence from option backdating

AbstractSocial capital potentially influences corporate outcomes by reducing the likelihood of managerial self‐serving behavior. This expectation follows from the likelihood that the consequences of self‐serving behavior are severe for firms in high‐social‐capital areas. Thus, we employ a sample of firms that backdated option grants to examine these propositions. Accordingly, we find a negative and significant relation between social capital and the probability and magnitude of backdating. Furthermore, we find a positive and significant relation between social capital and likelihood, as well as between the speed of the termination of senior executives and board members following option backdating. Notably, we find evidence for the notion that community norms can influence corporate behavior by creating an environment where self‐serving or bad behavior has severe consequences.

Trust and Debt Contracting: Evidence From the Backdating Scandal

AbstractWe study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the backdaters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.

The Role of Deferred Equity Pay in Retaining Managerial Talent*

ABSTRACTWe examine the extent to which deferred vesting of stock and option grants (deferred pay) helps firms retain executives. To the extent an executive forfeits all deferred pay if they leave the firm, deferred vesting will increase the cost (to the executive) of an early exit. The impact of deferred pay on executive retention, a key ingredient for firms to create shareholder value is hence an important empirical issue. Using pay duration proposed in Gopalan et al. (2014) as a measure of the extent of deferred equity, we find that CEOs and non‐CEO executives with longer pay duration are less likely to leave the firm voluntarily. The talent retention role of deferred pay is mitigated by performance‐vesting provisions and signing bonuses offered by industry peers. Moreover, we also find that voluntary turnover is less sensitive to pay duration for executives who are perceived to be more talented and have more firm‐specific skills. Overall, our study highlights a strong link between compensation design and turnover of top executives. It suggests that firms take into account the need for retaining managerial talent in designing executive compensation.

Board gender diversity and the timing of CEO stock option awards

ResumoObjetivoEste estudo busca explorar o papel da diversidade de gênero no conselho de administração para mitigar o destino do CEO. Os CEOs têm “sorte” de receber opções de compra de ações nos dias em que o preço das ações é mais baixo no mês de concessão, o que é um momento oportunista.Desenho/MetodologiaFoi utilizada uma análise de regressão logística, bem como uma análise de variáveis instrumentais (IV). A amostra é composta por 3.249 observações de empresas de 2010 a 2015.ConclusõesNossos resultados mostram que as diretoras inibem significativamente o momento oportunista de outorga de opções. Descobrimos que a diversidade de gênero, medida pela porcentagem de mulheres no conselho de administração, a porcentagem de conselheiros independentes e a porcentagem de diretoras no comitê de remuneração, provavelmente reduz as chances de CEOs receberem subsídios da sorte em tempo hábil. Nossos resultados são consistentes com pesquisas anteriores que documentam os benefícios da diversidade de gênero no conselho.Implicações práticasOs resultados da pesquisa são relevantes para os formuladores de políticas e reguladores, pois permitem que avaliem a importância da diversidade nos conselhos na gestão de gerentes, especialmente no que se refere ao desenho de políticas. Além disso, esses achados têm implicações para os países ibero-americanos, uma vez que lançam luz sobre a importância de empreender medidas e reformas para promover a eficácia dos conselhos por meio da introdução da diversidade de gênero.Originalidadeembora a evidência científica prévia tenha examinado o efeito da diversidade de gênero do conselho no desempenho da empresa, nosso estudo é o primeiro a investigar o efeito das diretoras no momento oportunista de concessões de opções, usando uma estrutura empírica rigorosa que explica explicitamente a endogeneidade.

THE VALUE OF BEING LUCKY: OPTION BACKDATING AND NONDIVERSIFIABLE RISK

The practice of executives influencing their option compensation by setting a grant date retrospectively is known as backdating. Since executive stock options are usually granted at-the-money, selecting an advantageous grant date to coincide with a low stock price will be valuable to an executive. Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Executives who have the opportunity to backdate should take this into account in their valuation. We quantify the value to a risk averse executive of a lucky option grant with strike chosen to coincide with the lowest stock price of the month. We show the ex ante gain to risk averse executives from the ability to backdate increases with both risk aversion and with volatility, and is significant in magnitude. Our model involves valuing the embedded partial American lookback option in a utility indifference setting with key features of risk aversion, inability to diversify and early exercise.

Optimal contracting under mean-volatility joint ambiguity uncertainties

We examine a continuous-time principal-agent problem under mean-volatility joint ambiguity uncertainties. Both the principal and the agent exhibit Gilboa–Schmeidler’s extreme ambiguity aversion with exponential utilities. We distinguish between expost realized and exante perceived volatilities, and argue that the second-best contract necessarily consists of two sharing rules: one for realized outcome and the other for realized volatility. The outcome-sharing rule is for uncertainty sharing and work incentives, as usual, and the volatility-sharing rule is to align the agent’s worst prior with that of the principal. At optimum, their worst priors are symmetrized, and realized compensation is positively related to realized volatility. This theoretical positive relation can be consistent with popular managerial compensation practices such as restricted stock plus stock option grants. A closed-form solution to a linear-quadratic example is provided.

Does board gender diversity reduce ‘CEO luck’?

AbstractWe explore the role of female directors in mitigating CEO luck. CEOs are ‘lucky’ when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing. Our results show that board gender diversity significantly deters the opportunistic timing of option grants. The effect of board gender diversity is 17.19 percent stronger than that of board independence in reducing CEO luck. Board gender diversity plays an effective governance role, even more effective than board independence does. Our results support the benefits of board gender diversity in mitigating the agency cost.