Lucky CEOs and Lucky Directors

By L. Bebchuk, Yaniv Grinstein, U. Peyer. 2009

325 citations recorded by the source corpus.

This paper integrates and further develops the analysis of two discussion papers we circulated earlier, “Lucky CEOs” and “Lucky Directors.” Our study contributes to understanding the corporate governance determinants and implications of backdating practices during the decade of 1996-2005. Overall, our analysis provides support for the view that backdating practices reflect governance breakdowns and raise governance concerns.Our analysis focuses on at-the-money “lucky” grants awarded at the lowest price of the grant month. In particular, we find that:(i) Opportunistic timing has been correlated with factors associated with greater influence of the CEO on corporate decision-making, such as lack of a majority of independent directors, a long-serving CEO, or a lack of a block-holder with a “skin in the game” on the compensation committee; (ii) Grants to independent directors have also been opportunistically timed and that this timing was not merely a by-product of simultaneous awards to executives or of firms’ routinely timing all option grants; (iii) Lucky grants to independent directors have been associated with more CEO luck and CEO compensation; (iv) Rather than being a substitute for other forms of compensation, gains from opportunistic timing were awarded to CEOs with larger total compensation from other sources; and(v) Opportunistic timing was not driven by firm habit but rather, for any given firm, the use of such timing was itself timed to increase its profitability for recipients. (vi) The odds of a CEO’s grant being lucky were significantly higher, controlling for CEO and firm characteristics in our dataset, when a preceding grant to the CEO was lucky as well.Because our analysis suggests that the existence of lucky CEO and director grants is a variable that can be useful to research studying firms’ governance and decision-making, we make available on the website of the Harvard Program on Corporate Governance a dataset of CEO and director luck indicators based on our work.Lucky CEOs is available on SSRN at: http://ssrn.com/abstract=945392Lucky Directors is available on SSRN at: http://ssrn.com/abstract=952239

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/e974d6d96c278eff4b4ab5eb64be505c7e087b32

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

Citations in the corpus

Zombie Board: Board Tenure and Firm Performance (2013, methodology): “Following Bebchuk et al. (2009), I use the Entrenchment Index (E Index) to measure shareholder power, where a higher E index”
Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating (2012, methodology): “Prior research suggests that some outside directors received BD options, or at least options opportunistically timed ahead of stock price increases (e.g., Bebchuk et al., 2010).”
Performance Terms in CEO Compensation Contracts (2015, unknown): “…studies such as Yermack (1997), Bertrand and Mullainathan (2000, 2001), Lie (2005), Bebchuk and Jackson (2005), Kuhnen and Zwiebel (2008), and Bebchuk, Grinstein, and Peyer (2010), all point to the positive relation between lack of transparency in contractual terms and questionable…”
Opportunism as a Firm and Managerial Trait: Predicting Insider Trading Profits and Misconduct (2017, methodology): “Similarly, Bebchuk, Grinstein, and Peyer (2010) identify 1,741 CEO grants as likely backdated in the pre-SOX period.”
Corporate social responsibility, board of directors, and firm performance: an analysis of their relationships (2014, background): “There are many arguments in the literature supporting mainly a positive relation between the proportion of external and independent directors on the board and firm performance in terms of financial profitability and market value (Bebchuk et al. 2010; Boeker and Goodstein 1993; Chhaochharia and Grins”
Executive Compensation: A Survey of Theory and Evidence (2017, unknown): “Becker (2006) uses data on CEO wealth, available in Sweden, as a (negative) proxy for risk aversion under the assumption of decreasing absolute risk aversion.”