The percentage of chief executives receiving new stock option grants increased from 30 percent in 1980 to nearly 70 percent in 1994, report the authors. Aboody and Kasznik's research was made possible by new Securities and Exchange Commission disclosure rules issued in 1992. They require more details about top executives' pay be made public than had been available before. Proxy statements now report an option's duration and expiration date, which enabled the researchers to determine the exact date of the stock option award, a key factor in their analysis. Nearly all stock option awards are granted with a fixed exercise price that equals the stock price on the date of the award.
Many companies also have a regular schedule for awarding options to their top managers.
That feature allowed the researchers to test their hunch that CEOs manage their disclosures, such as positive or negative product and earnings forecasts. They screened out cases in which top managers might have influenced the timing of the awards themselves. Playing with disclosure dates does not seem to expose executives to the same level of legal liability as other forms of insider trading, says Kasznik. After all, a CEO may be able to manipulate an option price lower, but it doesn't create a profit until the option is exercised some time later. One way to minimize CEOs' incentive to manipulate disclosures in this way is to set award dates after quarterly announcements, the authors wrote.