Lucky Directors

Abstract

While prior empirical work and much public attention have focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% were "lucky grant events" falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. Furthermore, grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal, as well as when the board did not have a majority of independent directors.

Independent directors and the propensity to pay dividends

“…It is the value of the equity in the total compensation structure that is of interest since the compensation is designed to attract and motivate directors to serve on the board at a time when the supply of directors are decreasing but their workloads are increasing (Linck et al, 2009). (Bebchuk et al, 2006). Linck et al (2009) also recognize potential monitoring problems associated with the increasing use of equity incentives in director pay in the post-SOX period, and conclude that it may be a 'bad' governance practice.…”

The impact of the options backdating scandal on shareholders

“…However, we do focus on firms that are publicly involved in the scandal, which, in turn, may cause the common perception about new economy firms' inclination to backdate. Indeed, Bebchuk et al (2006b) show that, by their measure, most of the manipulated grants likely take place in old economy firms.…”

Determinants of director compensation in two-tier systems: evidence from German panel data

“…Kumar and Sivaramakrishnan 2008), for example through collusion between directors and management (Tirole 1986). Hence, director compensation is presumed to be the result of a bargaining process between shareholders and directors, where the former anticipate that directors are likely to pursue their own interests and to extract additional rents (Jensen and Murphy 2004;Bebchuk et al 2007). Assuming that the bargaining power is completely allocated to suppliers of equity capital, who bear the ultimate risk, shareholders then aim to establish contractual structures that minimize corresponding agency costs (Williamson 1984;Jensen 1993).…”