Stock Option Grants: Opportunistic Timing or Efficient Contracting?

This study examines how the Sarbanes-Oxley Act of 2002 and the compensation disclosure rules of 2006 affect the timing of stock options granted to executives and directors. We find that in the post-disclosure-regulation period, opportunistic timing behaviour persists for executive grants but not for director grants. Investors can earn abnormal returns of 6%, 2.4%, and 1.2% within 30 days following executive option grants in the pre-SOX, post-SOX, and post-disclosure-regulation periods, respectively. The significant economic gain suggests that executives benefit from the flexibility of timing option grants. We also find that the degree of timing behaviour is negatively associated with the level of executive total compensation and equity compensation. The evidence suggests that boards of directors are aware of timing behaviour but add no restrictions, consistent with the argument that timing option grants is part of efficient contracting.