Suspiciously Short: CEOs With Stock Options May Purposely Miss Earnings Targets

Date Added: Sep 2009
Format: HTML

Giving managers stock option grants aligns their interests with those of shareholders, at least according to conventional wisdom. Research has confirmed that this is usually true, but a new study shows that in some cases, CEOs purposely miss earnings targets to cause a drop in stock prices just before the time for stock option grants - an outcome clearly inconsistent with shareholders' interests. For firms that set aside a portion of earnings to bolster future statements - a practice known as managing earnings downward - the likelihood of missing targets increased with stock-option grants.