NBC News: New study details the sneaky way some CEOs can make money when the company’s stock falls
Originally found at NBC News, by Erik Sherman
Chief executive officers are driven by success, and the more they can get for their companies, the better their personal fortunes. At least that’s the theory behind corporations loading up their CEOs with stock or, as the experts put it, “aligning CEO and shareholder interests.”
But a new study from researchers at the University of Georgia, the University of Notre Dame, and Lehigh University shows that sometimes the opposite is true.
Stock options give someone the right to buy a certain number of shares at the price of the day the options are granted, respectively called the strike price and the strike date. If share values rise, so does the value of the options, even if the person hasn’t yet bought the stock.
The release of negative news can mean extra money—frequently hundreds of thousands of dollars—for a CEO with stock options coming due.
An example is the options backdating scandal of the mid-2000s, when researchers such as Erik Lie of the University of Iowa found that thousands of companies dated options as though they were given before they actually were, choosing a time when share prices were particularly low. That boosted the value for the executives receiving them. Such a move is legal if done properly, including informing investors. Often it wasn’t.
The new options twist
The new study shows a twist in options shenanigans: Many companies distribute optional press releases with a negative tone that drive down the share price around the option strike date. Then the price returns to a more normal level, netting the CEOs of the companies a hefty return.
The results were comparable to those from the backdating scandals. "There was a 2 percent dip in the stock price—and 30 [trading] days after, it was a 2 percent or more rise in the price," Timothy Hubbard, assistant professor of management at Notre Dame, told NBC News.
Continue reading original article at NBC News.
Read the original research in Academy of Management Journal
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