Tuesday, November 14, 2006

Sleezy CEO's and their tactics

An interesting article from Fortune Magazine as linked in the title:

The scandal has its roots in a 1992 SEC decree that companies list in their annual proxy statements the exact dates that they gave stock options to top executives. The dates had been disclosed before, but only in mailed-in filings that no one ever looked at.

To corporate America, the new rule was a minor hassle; to a first-year New York University finance professor named David Yermack, it was a new source of interesting data. Yermack began examining stock prices before and after options grants, and found the eerily consistent pattern displayed (in updated form) in the chart on this page: The average company's stock price dropped in the days before its CEO was given a bushel of options, and rose afterward.

Executive options are usually granted "at the money" - i.e., if the stock is at $10, the CEO gets options to buy it for $10 a share - so getting options on a bad day for the stock is good news for the recipient.

What's really interesting is how this information is being discovered:

The first lesson to be learned from this brief history is that we should pay more attention to number-crunching B-school professors, who now have played a key role in uncovering two major business scandals. After-hours trading in mutual funds, remember, was brought to light by Stanford economist Eric Zitzewitz and other scholars.

These professors are providing a much needed checks and balance on the system and in my book deserve kudos for their attempts to bring this information out into the public eye.

1 comment:

Hooda Thunkit said...

It's the same old story; those on the inside benefiting from miraculously timed transactions that they always seem to benefit from financially.

Too bad we don't have the same miracles working for us independent investors, I could use a few breaks like that.