Thursday, April 16, 2015

Nice job, CEOs

Due to pigheadedness, at least 50 percent of it mine, we've had a scheduling conflict at NYU the last couple of years, with both the Tax Policy Colloquium and the Law and Economics Colloquium meeting on Tuesdays in the spring semester.  This unfortunately will continue next year, as no one has blinked.

Just as a matter of topic, not all of the L & E papers interest me, and the same of course is true in the other direction as well, but there are cases running both ways in which the organizers of one would have liked to attend the other.

Good example next Tuesday, when we will have a very interesting paper on the optimal taxation of housing consumption by David Albouy.  Meanwhile, the Law & Economics Colloquium will have a paper by Rob Daines (formerly NYU, now Stanford) on options and executive compensation.

Here's the abstract:

"In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures."

Nice stuff, huh?  I am glad these CEOs are working so hard; it's just too bad for whom they're working.


nairobiny said...

A related story about a former audit client of mine, who should probably remain nameless to protect the guilty.

They used to process their options in-house, ie the company secretary would exercise the options on their employees' behalf and send them the net-of-tax proceeds. The CEO went to the company secretary on option exercise day and insisted that she process his options first so he would get the highest price. Presumably he supposed that once the market twigged that it was option exercise day, the share price would fall on account of the dilution.

Anyway, I'm pleased to say she always ensured that he was one of the last to be processed.

Anonymous said...

«a paper by Rob Daines (formerly NYU, now Stanford) on options and executive compensation. Here's the abstract:
"In the wake of the backdating scandal,»

Option backdating involved enormous amounts (hundreds of millions of dollars) of easily proven tax frauds, such frauds being one of the major reasons why option backdating was done.

How many people have been convicted of those felonies?

At some point the IRS had started to look into these tax frauds, but the issue apparently "evaporated".