CEOs are turning a negative into a payout, study finds

UGA research indicates rogue CEOs time negative news to benefit their stock options
Graphic of man trading stocks on phone


  • The study found a pattern of executives issuing negative press releases about their companies before their scheduled stock option grants.
  • The practice allows executives to increase their compensation by temporarily driving down the stock price when they exercise their options.
  • The authors suggested the maneuver could effectively be curbed by issuing stock options multiple times throughout the year as part of the executives’ pay package.

Executives who receive stock options as part of their pay packages can’t control the date when their options are granted, but they can — and often do — control the environment that affects the value of those shares.

A recent study from management researchers at the University of Georgia Terry College of Business found a pattern of executives issuing negative press releases about their companies before their scheduled stock option grants. The practice, which is seen as unethical and sometimes illegal, allows the executives to increase their compensation by temporarily driving down the price of the stock when they are given the options.

“We can’t say with certainty that a given CEO is doing this,” said Tim Quigley, who studies CEO behavior and effectiveness at UGA’s Department of Management. “But we can look at the population and say, these trends would be very unlikely if a large number of CEOs were not purposely working to reduce the stock price before their option grants.”

Quigley and his colleagues tracked four years of stock option grants to look for abnormally low prices correlated with negative press releases. Out of the 1,753 grants given to a cast of 460 CEOs, they found about 55% of option grants were given at abnormally low price trough preceded by negative releases. In about 11% of cases, CEOs had this happen more than once, and those troughs seemed to be triggered by negative press releases.

The researchers found that the price trough for shares was, on average, 13% lower than the price just a few weeks before the options were exercised. These differences can add up to a million dollars of ill-gotten compensation if the situation is right, Quigley said. Also, the practice leaves shareholders on the hook for money lost when the stock dips and causes a larger charge to income when the options are granted.

The phenomenon of stock options being recorded at abnormally low prices is not new. Researchers in the early 2000s found evidence that executives were backdating their stock option grants to a point where the granting price would be most advantageous. The average discount that CEOs saw through backdating was about 12%.

“It was unethical, unsavory at best, and in some cases it was illegal,” Quigley explained. “It’s not illegal to do it, but it’s illegal to not disclose it. After the practice was uncovered, there were some criminal investigations that caused some companies some strife.”

The practice of backdating was eliminated by the Sarbanes-Oxley anti-fraud law in 2002, but academics who study market trends are still observing that CEOs receive stock options at statistically unlikely low prices, Quigley said.

To investigate the latest stock option maneuver, Quigley worked with Tim Hubbard, a Terry Ph.D. graduate who is now an assistant professor at Notre Dame University, Scott Graffin of UGA and Andrew Ward of Lehigh University. Using publicly available data collected by the Securities and Exchange Commission to track recorded stock options, they reconstructed all of the press releases issued during the study period.

Publicly traded companies are required to make public releases of information that may impact the value of the company, but CEOs have tremendous discretion on what constitutes material information, when those releases are made, and the tenor of the releases.

“We saw a pattern of firms releasing more negative news leading up to stock option grants than at any other time of the year,” Quigley said. “And the timing of the release of news from the company is something these executives can manipulate.”

For management scholars, the phenomenon illustrates an ongoing problem with information asymmetry – the concept that CEOs will always have more information than their shareholders or board, and therefore will have an advantage over them, Quigley said. Stock options were one mechanism the business world has found to align the interest of executives and their shareholders, but the UGA study shows that stock options aren’t silver bullets. Some CEOs are still going to behave unethically and use their information advantage to profit at the expense of shareholders.

While Quigley’s study doesn’t pinpoint individual bad actors, some specific circumstances seem to be connected to this behavior. They found that CEOs who are underpaid, in comparison to their peers, are more likely to work to fix their stock option values. CEOs who have more discretion, due to diversity in their lines of business or lack of regulation, are also more likely to engage in this practice.

The researchers suggest the practice could effectively be curbed by issuing stock options throughout the year as part of the executives’ pay package. Multiple stock option grants rather than just one annual grant would make it much more difficult to manipulate the stock price for the CEO’s advantage, Quigley said.

Unintended Consequences: Information Releases and CEO Stock Option Grants” appears in the February 2020 issue of the Academy of Management Journal.