Shocking: CEOs Do Things for Personal Gain

Shocking: CEOs Do Things for Personal Gain

October 8, 2014 Research Insights
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(Last Updated On: January 18, 2017)

Strategic News Releases in Equity Vesting Months

Abstract:

We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases.

Alpha Highlight: 

Information impacts asset prices. CEOs have discretion to manage the timing of information to the marketplace. A natural hypothesis is that CEOs might use this discretion to release information for their own personal benefit.

To test this hypothesis, the authors investigates whether CEOs strategically change the timing of news release for personal gains. To be specific, the paper hypothesizes that a CEO will delay or accelerate news releases into the months in which their equity vests. For those who are unfamiliar with “vesting,” one can think of vesting as the trigger that allows the CEO to actually access the value of their shares. Once the CEO vests their equity, they can sell the shares.

Key Findings:

First, the paper hand-collects vesting data from 2006 to 2011 and performs a statistical analysis to test whether news releases are strategically coordinated with vesting periods. All else equal, a CEO might want to time good news at the same time their equity vests, so they can maximize the price at which they sell their equity in the marketplace.

  • The table below shows that firms release 4% more discretionary news in vesting months (divide the coefficient of 0.0615 by the average number of discretionary news releases of 1.48 per month to get 4%).
  • Discretionary disclosures are significantly higher in “vesting months” and significantly lower in the months before and after “vesting months”.
2014-09-30 11_21_55-Strategic News Releases in Equity Vesting Months.pdf - Adobe Reader
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The paper also studies the effects of news releases on trading volume and stock returns.

  • In the table below, the disclosure of one discretionary news item in a “vesting month” generates a significant 16-day abnormal return of 28 bps (which equates to an average gain of $14,504).
2014-09-30 11_34_01-Strategic News Releases in Equity Vesting Months.pdf - Adobe Reader
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
  • The graph below vividly shows the transient increase in trading volumes after a news release. To be specific, on the first day after a discretionary news release, abnormal trading volume rises by 0.32%, compared to the mean of 0.22%.
2014-09-30 12_31_13-Strategic News Releases in Equity Vesting Months.pdf - Adobe Reader
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The final step is to demonstrate that CEOs take advantage of the transient boosts in stock prices and trading volume.

  • The charts below illustrate that 50% of CEOs engage in their first equity sale within 5 to 6 days of the last discretionary news release. CEOs seem to be selling into the news release.
2014-09-30 12_37_55-2014-09-30 11_41_42-Strategic News Releases in Equity Vesting Months.pdf - Adobe
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The evidence seems to suggest that CEOs exploit their ability to “time news releases” such that they maximize the value on their vested shares.


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Michael Milburn

    So if you’re on the board and want to focus CEO on value creation (reference previous article regarding benefits of academics on board of directors) do you suggest finely minced vesting rather than lumpy vesting (on a single date)? Anecdotally, I felt this was a problem at a company I previously worked at – not just in timing of news events, but in timing company-wide strategies. Obviously incentives matter, and as an employee it can sometimes be frustrating to see short term activities implemented that seem only effective in juicing short term results – usually at the expense of creating longer term value. I noticed this to be particularly the case when a CEO was retiring – all the short-term stops would be pulled out and the replacement CEO would be left to clean up the mess. Then cycle would repeat itself.

  • Hey Michael,
    I am not a corporate finance specialist–although many of my academic colleagues could probably point you in the direction of a 100+ papers on the question you asked.
    I imagine some sort of staggered vesting or a “clawback” type provision would prevent executives from trying to pump the book for the exit.
    Great questions, sorry I can’t get you a more informed answer. I’ll ask around and see if there is any research on this subject

  • Michael Milburn

    Wesley, no need to spend time looking for info – I’m just casually thinking about the issue of properly aligned incentives. The minute a certain measurement becomes an incentivized goal is the minute that creative minds start finding ways to game the measurement. I looked at something Buffett said, and he says he has “clawback” provisions for Todd Combs and Ted Weschler so they earn 1/3 of a bonus for beating the S&P but can loose the other 2/3 back if subsequent performance deteriorates. It seems Buffett also had comments related to the right kind of people who are already naturally motivated – emphasizing that most CEOs don’t need the money, and instead can see the company more as a canvas on which to paint their life’s work. It’s the basis of his staying out of the way, letting them run their own ship, and recognizing their accomplishments. But he has to trust them to do the right thing as a prerequisite.