By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option...

This study examines whether the CEO uses share repurchases to sell her equity grants at inflated stock prices, a concern regularly voiced in politics and media. We find that the timing of buyback programs and equity compensation, i.e., the granting, vesting, and selling of equity, is largely...

This study empirically investigates the effects of options trading on future stock returns. Leveraging the Shanghai Stock Exchange 50 exchange-traded fund (50ETF) options trading data in China, we show that put-call ratios, skewness ratios, and China's Volatility Index exhibit economically and...

In this Closer Look, we examine a new industry that has arisen in recent years to facilitate the financing of stock-option exercises for employees and executives of pre-IPO companies. These capital providers allow individuals to exercise and retain their stock option awards, meaning the employee...

Executive equity compensation is granted out of an equity incentive plan that must be approved by shareholders. Equity incentive plans are an important precursor to equity grants because plan terms give boards of directors discretion over the amount and features of equity that can be granted...

Because prior studies find mixed results on the relation between CEOs’ pay performance incentives and a firm’s likelihood of financial reporting fraud, we restudy their relationship using innovative research methods. First, we concentrate on incentives from granting options rather than...

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine...

We examine the role of employee stock option plans (ESOPs) in mitigating agency problems in New Zealand firms. We find that ESOPs have a significant and positive effect on firm performance relative to their non-ESOP counterparts. This relation appears within a year from the first ESOP...

This article introduces new theories pertaining to optimal disclosure for equity-based incentives ("EBI") in general and for incentive and compensatory Employee Stock Options ("ESOs") in particular; within the context of competition. The article then develops the quantitative characteristics of...

The article seeks to: a) critique existing academic thought on economics of incentives and contracts, b) analyze the impact of Equity-Based Incentives (EBIs) on risk and vice versa; c) show how EBIs cause information assymmetry,and vice versa.The use of EBIs and incentives are heavily influenced...

This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial 'playing-it-safe' behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both...

Using the details of vesting terms, we document that stock options granted in high investor sentiment periods tend to have shorter vesting periods and durations, and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date, relative to...

The incentive effect of CEO portfolio delta (i.e., the sensitivity of CEO wealth to changes in stock price) on financial misreporting is inconclusive given a complex reward-risk tradeoff faced by CEOs (e.g., a positive “reward effect” versus a negative “risk effect”). We propose that the...

We examine the sorting role of broad-based equity pay using detailed employee-level data. We propose trust in management as an important and beneficial characteristic over which equity pay sorts employees, as such pay typically leaves employees with concentrated positions in employer stock and...

Employee compensation may impact payout policy by (i) incentivizing managers with non-dividend-protected options to favor repurchases over dividends and (ii) diluting earnings, which firms can neutralize through share repurchases. Both the dividend-protection and dilution channels imply a...

In this study, we examine whether CEOs' stock-based compensation has any relationship with the disclosure of highly proprietary information. While prior studies suggest that stock-based compensation provides managers with an incentive to enhance their voluntary disclosures in general, we argue...

Equity-based compensation causes increases in firms' share count and dilutes Earnings Per Share (EPS), which provides firms with an incentive to raise EPS using either share buybacks or earnings management. We employ a regression discontinuity framework to provide evidence of a causal link...

We examine when and why executives retain vested restricted stock. A growing literature uses equity vesting events as a predictor of insider selling and, by extension, managerial myopia. Excluding mechanical tax withholdings, however, we find that executives do not sell vested restricted equity...

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Using grant level compensation data and a hand-collected sample of monthly repurchases, I find a positive causal relation between CEO equity sales and share repurchases. I identify the relation...

We examine the extent to which participation constraints influence CEO annual equity grants. Studying CEO equity grants over the period 2006-2016 and using equity grants to compensation peers as a proxy for the reservation equity grant level, we find that the reservation wage in equity is a...

We examine stock return predictability of "Out-of-The-Money (OTM) put-to-OTM call trading volume ratio" (OTMPC). Our numerical analysis predicts that informed investors hardly write OTM options because the leverage effect is not sufficient to compensate for transaction costs. OTMPC, thus,...

We study how the existence of important production contracts affects the choice of CEO compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff...

Using the details of vesting terms, we document that stock options granted in high sentiment periods tend to have shorter vesting period/duration, and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date relative to low sentiment...

We examine how informed traders trade in the option market around news announcements. We show that their profits depend on whether positions are long or short, whether trades take place before or after news releases, and whether events are scheduled or unscheduled. We predict and find that...

This study examines management's response to the change in accounting for stock option-based compensation imposed by SFAS No. 123R, whose implementation is expected to reduce reported income. To cope with this impact, management may be motivated to decrease the use of stock options as part of...

We find that CEOs release 20% more discretionary news items in months in which they are expected to sell equity, predicted using scheduled vesting months. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information...

Using new empirical measures of information leadership, we find that the role of options in price discovery is up to five times larger than previously thought. Approximately one-quarter of new information is reflected in options prices before being transmitted to stock prices, with options...

Theory is conflicted on the impact of equity-based compensation on managerial risk taking. We explore this issue by studying the relation between equity-based compensation and firms' propensity to make acquisitions. Consistent with the notion that equity-based compensation encourages managerial...

While boards are known to react to corporate misconduct by removing the executives responsible, little is known about whether the board's response is shaped by the firm's social context. Using the 2006 stock option backdating scandal, in which firms manipulated stock option grant dates, we...

This paper presents a model of a firm that backdates the granting of executive stock options in order to maximize actual compensation for a given level of reported compensation. The model is used to estimate the magnitude of the difference between the actual and reported values of option grants....

This paper links the CEO's concerns for the current stock price to reductions in real investment. We identify short-term concerns using the amount of stock and options scheduled to vest in a given quarter. A one standard deviation increase in vesting equity is associated with an annualized 0.2%...

This paper develops an agency model to analyze the optimality of executive stock option compensation in the presence of information manipulation. The analyses show that although information manipulation is positively related to the size of option compensation, the relative size of...

This paper examines the effects of executive compensation and potential for earnings management on the incidence of shareholder class action lawsuits and their outcomes. Although damage measurement factors,managerial option intensity, and earnings management all significantly affect the...

We examine whether features of bank executives' compensation contracts cause them to take actions that contribute to systemic risk. Using multiple return-based measures of systemic risk coupled with an identification strategy that exploits heteroskedasticity to account for endogenous matching of...

The aim of this work is to understand and measure to what extent equity options price credit risk. With the exception of Toft and Prucyk (1997), which is a dated work based on the simplistic assumption of a reference company issuing perpetual debt, all the work in the literature which try to...

We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. The negative effect is stronger for...

Stock-based compensation (SBC) reduces the value of shareholder equity, ceteris paribus, and is a significant and growing expense for many firms. Despite its valuation implications and its growing importance, anecdotal evidence suggests that market participants ignore SBC in valuation. We first...

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a...