A Business Insider analysis of more than a decade's worth of executive compensation data suggests that some corporate leaders could be enriching themselves by timing market-moving announcements around scheduled stock options grant dates.
Stock options give an employee the right to buy company shares at a fixed "strike" price, normally set on the day the option is awarded, and sell them later at market value. Stock options are designed to be an incentive to improve company performance — the bigger the gap between the strike price and the eventual market sale price, the bigger the payday.
After the options backdating scandal of the late 2000s, in which executives at myriad publicly traded companies were found to have illegally altered grant dates to create lower strike prices, most companies addressed an obvious loophole by scheduling grant dates well in advance.
This created a new opportunity: Executives could time key announcements around these fixed dates, disclosing negative news just before granting options to drive the stock price down, or positive information soon afterward to drive it up.
Either scenario causes the strike price — and therefore the eventual cost to exercise the options — to be at a relative low point, creating an opportunity to earn a more handsome sum.
BI found a widespread pattern of a drop in some companies' share prices in the run-up to regularly scheduled grant dates, followed by a corresponding climb in the weeks afterwards.
"Statistically, there's no way this pattern is an accident," said Robert Schonlau, a finance professor at Colorado State University who studies executive compensation and analyzed BI's dataset. Schonlau, who coauthored a 2018 paper on the phenomenon, said researchers would expect price fluctuations to be random around an executive's grant date, "unless there is something else at play, that is nonrandom, and not understood by investors."
Schonlau dubbed it "options opportunism."
Bullet-dodging and spring-loading
Options opportunism comes in two forms.
"Bullet-dodging" is when bad news — a product rollout has flopped, say — is released before a grant date, driving the share price down.
Companies also can hold good news — encouraging results from a drug trial, for example — until after a grant date, driving the share price up, a practice known as "spring-loading."
Either scenario offers executives a similar financial benefit to the backdating of years past, as their scheduled grant date coincides with a relatively low point in share price. This can help executives avoid the consequences of bad news on their watch or artificially build in gains from good news.
Companies that engage in options opportunism by controlling the timing of announcements around grant dates distort those incentives, which has drawn both shareholder lawsuits and regulatory scrutiny. Academics specializing in securities laws said option opportunism wouldn't likely violate any laws, however, provided firms properly account for the award in their financial filings.
After the options backdating scandal, many publicly traded firms began scheduling options grant dates months in advance, following the cadence of a calendar and structure of executive compensation committees. Some firms moved away from options grants entirely in favor of performance-based compensation plans, which award bonuses to executives when their stock hits benchmarks.
"I assumed these types of games were over," said Erik Lie, the University of Iowa finance professor whose groundbreaking research formed the backbone of a Wall Street Journal investigation in 2006 that fueled scrutiny of options backdating. Lie, along with a half-dozen other academic researchers interviewed for this story, said that BI's data analysis indicates that isn't the case.
By the numbers
To measure the prevalence of options opportunism, BI obtained data for every CEO options grant from companies in the S&P 500 from 2012 through 2023, collected by the executive compensation tracking firm Equilar. At BI's request, Schonlau analyzed the data to account for broader stock market shifts, using historical price information from the Center for Research in Security Practices.
This analysis surfaced instances of a significant change in share price near a grant date that couldn't be explained by broader market shifts.
The resulting pattern is most stark among the S&P 500 firms that awarded the highest number of stock options. These firms, on average, show a notable decline in stock price in the days and weeks leading up to executives' grant dates, followed by a consistent bump in subsequent weeks. The pattern is nonexistent for the same companies if you examine the time period six months prior to the grant date — the time that's typically furthest from a scheduled grant.
BI reporters researched the most dramatic swings, reviewing financial records and interviewing former employees, attorneys, and executive compensation specialists. In some instances, abnormal price fluctuations were explained by events outside executives' control. Many, however, appeared to be the result of announcements made by executives who controlled the timing.
BI identified more than 50 instances where firms announced negative news just prior to granting executives stock options, driving the price down, or positive information soon afterward, driving the stock price up.
Because publicly available information makes it impossible to tell when an abnormal price fluctuation indicates opportunism or is luck, BI isn't publishing the names of the companies that it found to have multiple years of significant stock price movements coinciding with grant dates.
Regulatory response
The SEC has tried to limit the gaming of options grants, issuing guidance in 2021 on how to assess fair value of grants and mandating new disclosure rules in 2022 that took effect for most companies this year. Companies must now disclose if they released material information within a day before or four business days after a grant date.
BI couldn't identify any instances where the SEC had taken enforcement action against a firm for failing to follow these guidelines, and an agency spokesperson also couldn't provide any.
Sven Riethmueller, a clinical associate professor at Yale Law School who has conducted research showing how pre-IPO companies manipulated their valuations to benefit executives while still complying with regulations, is skeptical, calling the SEC rules "too little, too late."
In proxy statements filed so far this year, scores of companies have submitted disclosures under the new requirements. In many instances, the filings amounted to the firm saying it had nothing to disclose.
Some observers expect firms will opt to avoid additional SEC scrutiny by refraining from making market-moving announcements during the specified six-day window around of options grants.
"The SEC is saying, 'Think about how this applies to your corporate governance when you award options,'" said Jerry Maginnis, a former auditor who spent years at KPMG advising tech companies. "What the SEC is trying to accomplish is to discourage this practice of giving spring-loaded awards in the first place."
Hannah Beckler contributed reporting.
