In the past fifteen years, stock options have gone from being the best incentive
and compensation tool for aligning the interests of managers and shareholders to
being vilified because of a string of scandals in corporate America as well as in
France concerning the granting (in terms of size and timing) and the exercise (in
terms of timing) of the stock options. They enable their holder to buy listed shares of
the company at a price close to the share price at the time of the grant ; the exercise
period starts a couple of years after the grant (the period between the grant and the
authorization of exercise is known as the vesting period), when hopefully the share
price will have undergone considerable growth, and the holder of the stock option will
make the profit between the share price and the exercise price.
Optimal stock holdings in fund portfolios shawkybfmresearch
The document analyzes the optimal number of stock holdings for mutual fund portfolios based on market performance between 1992-2000. It finds a significant quadratic relationship between the number of stock holdings and risk-adjusted returns, with an optimal number that balances diversification benefits against monitoring and transactions costs. The number of stocks held by funds remained fairly stable over this period, though there was cross-sectional variability. Changes in the number of stocks held were more correlated with fund flows than investment returns.
This document contains summaries of 9 case studies:
1) Tata Steel's acquisition of Corus Steel in 2007, which made Tata Steel the 5th largest steel producer worldwide but faced concerns over the high price paid.
2) Comparing risk-weighted returns of the BSE Sensex stock index and bank fixed deposits from 1992-2007.
3) ICICI Bank's "Get up to 100% Cash Back" credit card promotion of 2006 and potential pros and cons for consumers.
4) The role and effectiveness of SEBI, India's capital market regulator, in initiating reforms but still facing challenges in preventing scams.
5) Controversies surrounding Google's 2004 IPO
The paper opens with an overview of the
commodity trading advisor (CTA) sector, highlighting the
significant growth that has taken place in the managed
futures industry in recent years and explaining how
the managed futures strategies that CTAs employ
work in practice. The breadth of sub-strategies under
the managed futures umbrella are then examined.
The third part of the paper examines the benefits and
perceived risks to investors of allocating to managed
futures strategies and also addresses various common
misunderstandings about CTAs.
The paper concludes by exploring the common ways
as to how investors can access the various investment
strategies that are available
The delivery process consisted in the deregulation of local markets and international trends, which allowed the emergence of the phenomenon "globalization". This process has resulted in the restructuring of companies that are considered in the expansion of business, the level of competitiveness, expansion in the market of operations, technological adaptations and strategies; Mergers and Acquisition (M& A) characteristics operations. However, the main objective is to have priority in information promotion policies and initiatives to improve business conditions.
The objective of this article is to address the M& A theme in the context of globalization, seeking to answer the following question: what are the results obtained in the process of restructuring and operating M& A in the telecommunications company Oi S / A between the year of its creation and by the year 2016? To all that the literature review, literature studies, literature, literature studies, non-literature literature, pages, semantic studies, about the theme, being a bibliographic and descriptive research.
The study demonstrates that not always the processes of the frequency and license are advantageous to the parties related, due to character complexes that involve such operations. These groups can be supported in their search, mainly in studies on the market of action, differences in quotations and payments, employment opportunities in the societies involved.
The dream is to be able to continuously invest large sums of money to a sustainably high return. On average this is very unusual. Companies with low investments but high profitability handsomely beat those with high investments and low profitability. Also, check out the correlation between CEO salary and ROE level…
This document analyzes 63 rights issues conducted by S&P/ASX300 companies between 2010-2012 to compare actual underwriting fees paid against a benchmark valuation model. It finds that on average, companies paid a 46% premium over the benchmark value, equating to an aggregate $172M excess or $2.7M per raising. This suggests companies overpaid for underwriting services compared to the actual shortfall risk. Underwriting fees have also risen 60% over 20 years despite reduced risks, potentially harming investors. The study aims to determine if fee amounts reasonably reflect risks or if boards could obtain better value.
DealMarket DIGEST Issue 116 // 08 November 2013CAR FOR YOU
This weekly digest provides summaries of recent private equity news items:
1) KKR is teaming with Kuwait Petroleum Corp to bid up to EUR 5 billion for RWE's German oil and gas unit DEA.
2) A new study finds that specialist funds and those demonstrating value-add are in high demand, and that large asset managers may replace investment banks in some product lines within a decade.
3) A report shows that US public pension funds have achieved 10% annualized returns from private equity over 10 years, higher than any other asset class. The top performing funds were located in Massachusetts, Los Angeles, and Texas.
4) Global M&A activity in the insurance
DealMarket Digest Issue116 - 8th November 2013Urs Haeusler
- PE Eyes Multi-billion Investment in German-owned Oil & Gas Unit
- New Study Reveals Emerging PE Trends and a Major Shift
- PE Outperformance: Insight into Returns at Top US Pension Funds
- Insurance Industry M&A Trends Downwards: A Global Multi Year View
- PE Industry Sees Recovery But Increasing Competition
- Quote of the Week: Seismic Strategy Shifts
Optimal stock holdings in fund portfolios shawkybfmresearch
The document analyzes the optimal number of stock holdings for mutual fund portfolios based on market performance between 1992-2000. It finds a significant quadratic relationship between the number of stock holdings and risk-adjusted returns, with an optimal number that balances diversification benefits against monitoring and transactions costs. The number of stocks held by funds remained fairly stable over this period, though there was cross-sectional variability. Changes in the number of stocks held were more correlated with fund flows than investment returns.
This document contains summaries of 9 case studies:
1) Tata Steel's acquisition of Corus Steel in 2007, which made Tata Steel the 5th largest steel producer worldwide but faced concerns over the high price paid.
2) Comparing risk-weighted returns of the BSE Sensex stock index and bank fixed deposits from 1992-2007.
3) ICICI Bank's "Get up to 100% Cash Back" credit card promotion of 2006 and potential pros and cons for consumers.
4) The role and effectiveness of SEBI, India's capital market regulator, in initiating reforms but still facing challenges in preventing scams.
5) Controversies surrounding Google's 2004 IPO
The paper opens with an overview of the
commodity trading advisor (CTA) sector, highlighting the
significant growth that has taken place in the managed
futures industry in recent years and explaining how
the managed futures strategies that CTAs employ
work in practice. The breadth of sub-strategies under
the managed futures umbrella are then examined.
The third part of the paper examines the benefits and
perceived risks to investors of allocating to managed
futures strategies and also addresses various common
misunderstandings about CTAs.
The paper concludes by exploring the common ways
as to how investors can access the various investment
strategies that are available
The delivery process consisted in the deregulation of local markets and international trends, which allowed the emergence of the phenomenon "globalization". This process has resulted in the restructuring of companies that are considered in the expansion of business, the level of competitiveness, expansion in the market of operations, technological adaptations and strategies; Mergers and Acquisition (M& A) characteristics operations. However, the main objective is to have priority in information promotion policies and initiatives to improve business conditions.
The objective of this article is to address the M& A theme in the context of globalization, seeking to answer the following question: what are the results obtained in the process of restructuring and operating M& A in the telecommunications company Oi S / A between the year of its creation and by the year 2016? To all that the literature review, literature studies, literature, literature studies, non-literature literature, pages, semantic studies, about the theme, being a bibliographic and descriptive research.
The study demonstrates that not always the processes of the frequency and license are advantageous to the parties related, due to character complexes that involve such operations. These groups can be supported in their search, mainly in studies on the market of action, differences in quotations and payments, employment opportunities in the societies involved.
The dream is to be able to continuously invest large sums of money to a sustainably high return. On average this is very unusual. Companies with low investments but high profitability handsomely beat those with high investments and low profitability. Also, check out the correlation between CEO salary and ROE level…
This document analyzes 63 rights issues conducted by S&P/ASX300 companies between 2010-2012 to compare actual underwriting fees paid against a benchmark valuation model. It finds that on average, companies paid a 46% premium over the benchmark value, equating to an aggregate $172M excess or $2.7M per raising. This suggests companies overpaid for underwriting services compared to the actual shortfall risk. Underwriting fees have also risen 60% over 20 years despite reduced risks, potentially harming investors. The study aims to determine if fee amounts reasonably reflect risks or if boards could obtain better value.
DealMarket DIGEST Issue 116 // 08 November 2013CAR FOR YOU
This weekly digest provides summaries of recent private equity news items:
1) KKR is teaming with Kuwait Petroleum Corp to bid up to EUR 5 billion for RWE's German oil and gas unit DEA.
2) A new study finds that specialist funds and those demonstrating value-add are in high demand, and that large asset managers may replace investment banks in some product lines within a decade.
3) A report shows that US public pension funds have achieved 10% annualized returns from private equity over 10 years, higher than any other asset class. The top performing funds were located in Massachusetts, Los Angeles, and Texas.
4) Global M&A activity in the insurance
DealMarket Digest Issue116 - 8th November 2013Urs Haeusler
- PE Eyes Multi-billion Investment in German-owned Oil & Gas Unit
- New Study Reveals Emerging PE Trends and a Major Shift
- PE Outperformance: Insight into Returns at Top US Pension Funds
- Insurance Industry M&A Trends Downwards: A Global Multi Year View
- PE Industry Sees Recovery But Increasing Competition
- Quote of the Week: Seismic Strategy Shifts
Capital budgeting practices in emerging market economiesAlexander Decker
This document discusses a study that investigated the capital budgeting practices of listed firms in Ghana. The study found that:
1) Listed Ghanaian firms adopt standard capital budgeting techniques in practice, most commonly using NPV, PBP, DPBP, and IRR. However, MIRR and ARR were less commonly used compared to NPV.
2) Most firms used the weighted average cost of capital (WACC) to evaluate investment projects.
3) Respondents had worked at their firms for varying durations, most commonly 4-7 years, and played a role in recommending or authorizing capital budgeting decisions.
This document summarizes a study that reexamines the impact of merger accounting methods on market reaction. The study finds:
1) Tax-free mergers using the purchase method exhibited significant positive abnormal returns over the period studied, consistent with prior research. These returns appear to originate in the period before the announcement.
2) Other variables not included in capital asset pricing models do not influence these results.
3) Tests found indirect cash flow effects, like leverage and income manipulation, were associated with the accounting method used, providing a partial explanation for abnormal returns in purchase method mergers.
- The document is a dissertation that examines short-term wealth changes for acquirers of public and private targets in Greece from 1998-2010.
- It finds that Greek acquirers of public targets experience an insignificant mean CAR of -0.28%, while acquirers of private targets earn an insignificant mean CAR of +0.98%.
- The author performs univariate and multivariate tests to examine factors that could explain the "listing effect" observed internationally, where acquirers earn positive returns for private targets and zero or negative returns for public targets.
Event study on the impact of mergers and acquisitionseleclasson
This document provides details on an event study examining the impact of mergers and acquisitions on stock returns. It includes a literature review on motives for acquisitions and prior empirical evidence. The study analyzes acquisitions by UK firms of domestic UK targets and cross-border EU targets from 2006-2010. The methodology section outlines using an event study approach with a 3-day event window around acquisition announcements and 200-day estimation period to calculate abnormal returns. Hypotheses test for no abnormal returns for acquirers and differences between domestic and cross-border deals.
- The document analyzes whether using Markit's dividend forecasting data to create portfolios based on forward dividend yield leads to higher returns compared to portfolios based on historical trailing dividend yield or benchmarks.
- A portfolio based on Markit's high forward dividend yield (HFDY) outperformed a similar portfolio based on trailing yield (HTDY) and the S&P High Yield Dividend Aristocrats index in terms of total returns over the sample period.
- HFDY had higher annual returns and information ratio, indicating it generated more return for the risk taken compared to the other strategies. However, the SPDA benchmark had the lowest volatility and highest information ratio of the strategies analyzed.
This document summarizes a research paper that studied the effects of initial public offerings (IPOs) on the long-run performance of stocks listed on the Nairobi Stock Exchange in Kenya. The study found that 51.5% of the variation in long-run stock performance was explained by factors like the difference between the offer price and closing day one price, firm age, size, number of shares issued, and subscription percentage. The regression model showed that these independent variables significantly predicted long-run performance. Specifically, differences in offer price vs. closing price, firm size, and number of shares issued positively impacted long-run performance, while firm age and subscription percentage had a negative effect. The paper concluded that firms should implement
A study on financial performance analysis at cee veeAKHILHARIDAS
This document provides an overview of the global and Indian footwear industry. It discusses the history of footwear dating back to ancient civilizations. India has a large livestock population and is one of the largest producers and exporters of footwear globally, especially leather footwear. The key products exported are leather footwear, footwear components, leather garments, and leather goods. The footwear industry is concentrated in certain regions and states of India like Tamil Nadu, Delhi, Agra and Kanpur. The document also provides statistics on India's annual footwear production capacity and imports.
Absolute and Relative VaR of a mutual fund.Lello Pacella
Calculated Absolute and Relative VaR using Varcov Approatch, Parametric with EWMA-estimated volatility, Historical Simulation and Filtered Historical Simulation.
Does the capital assets pricing model (capm) predicts stock market returns in...Alexander Decker
This document examines whether the Capital Asset Pricing Model (CAPM) can predict stock returns in Ghana using data from selected stocks on the Ghana Stock Exchange from 2006-2010. The results found no statistically significant relationship between actual and predicted returns, indicating CAPM with constant beta cannot explain differences in returns. It was also found that some stocks were on average undervalued while one was overvalued over the period studied. The conclusion is that the standard CAPM model cannot statistically explain the observed differences in actual and estimated returns of the selected Ghanaian stocks.
Capital budgeting is the process of evaluating long-term investment projects. It involves identifying, analyzing, and selecting projects whose cash flows extend beyond one year. Management must allocate limited resources between competing projects to maximize firm value. Common capital budgeting techniques include net present value, internal rate of return, payback period, and accounting rate of return. Early studies in the 1970s found that simpler techniques like payback period were most commonly used in practice. More recent foreign studies show increased use of discounted cash flow methods. Indian studies also found payback period is popular due to its simplicity, though discounted cash flow techniques are gaining prominence. Risk adjustment is typically done through sensitivity analysis, conservative forecasts, or adjusting discount rates.
The document summarizes a study examining the stewardship activities of the "Big Three" index funds - BlackRock, Vanguard, and State Street Global Advisors. The study finds that while index funds have the potential to be effective stewards due to their large ownership stakes, their stewardship efforts are limited by agency problems. Specifically, the Big Three devote minimal resources to stewardship and engage with a small minority of portfolio companies. Their focus on governance principles over performance and director qualifications may not be optimal for investors. Overall, the evidence is consistent with index fund stewardship being influenced by incentives to under-invest in stewardship and defer excessively to corporate managers.
Research Project - Active versus Passive ETFs - An alpha or beta product - Ch...Christopher Sanderson
This document provides an introduction and literature review for a research project comparing actively managed ETFs to passively managed ETFs. The introduction discusses what actively managed ETFs are, potential issues they face, and why the research is important. The literature review covers previous research on topics like the definition of active ETFs, their history, developments, performance comparisons to mutual funds and passive ETFs, and issues around transparency. The document provides context and background information for analyzing the performance of active ETFs.
This document provides an introduction and overview of mutual funds. It discusses the history and development of mutual funds in India, which started in 1963 with the formation of Unit Trust of India. It then describes the four phases of growth of the mutual fund industry in India from 1964 to the present. It defines what a mutual fund is and provides background on the concept and structure of mutual funds. The document aims to educate readers on mutual funds and their role in the financial system.
The CBS Television surprise hit “Undercover Boss” has aired for six consecutive seasons and
features publicly traded firms, closely-held corporations, and in some instances not-for-profit institutions. While
there has been much analysis on the ethical dilemmas faced by the undercover CEO or other executive, no
practical analysis of a firm‟s profitability has been conducted on any of the firms featured on the show.
Conventional wisdom would suggest that financial performance of a featured firm would improve after the initial
airing date, as the show typically ends on a „feel good‟ note and most often places the executive, as well as the
firm, in a positive light. This paper analyzes the stock market price after the initial air date as well revenue and net
income for all publicly traded firms that have appears on the show through the end of the sixth season.
The document discusses various considerations and methods for demand forecasting, including factors that influence demand forecasting, different levels and types of forecasts, historical and statistical analysis techniques, and Engle's Law on consumption patterns relative to income levels. Demand forecasting is important for organizations and economies to function efficiently, and there are multiple approaches that can be taken depending on the specific product, time horizon, and other contextual factors.
The document discusses how the ETF market is expected to evolve between now and 2020. Key points include:
- ETFs are expected to continue growing rapidly in size and importance globally as their footprint expands beyond the US into new markets and segments.
- More types of investors are expected to adopt ETFs, including institutions, advisors, and individual investors. New ETF products targeting different strategies will also proliferate.
- Service providers that help launch and distribute ETFs are likely to play a larger role as competition increases and fee pressures mount.
- Regulatory changes could further encourage growth, though some challenges like distribution issues may slow expansion in some regions.
- To compete successfully
How Vietnam Stock Returns Response to Events AnnouncementBang Vu
This document summarizes the background literature on event study methodology and its application to analyzing stock price movements in response to corporate announcements and events. It discusses how event studies have been widely used in academic finance to test the efficient market hypothesis and analyze issues like the relationship between stock prices and dividends. While event studies have been conducted on developed and emerging markets, this paper aims to be one of the first to apply the methodology to study how Vietnamese stock prices react to earnings announcements, rights issues, and other events over the past decade since the market opened.
Venture capital valuation of small life science companies by Salim Gabro & Ro...Salim Gabro
Life science companies are research-intense companies with a high level of unpredictability of the product development. This is due to high dependency on the success of clinical studies, regulatory affairs, and immaterial property, which makes the industry special in comparison with most other industries. Valuation becomes challenging looking at companies that are not publicly listed. What is the value of a company with no established market price and a high level of future uncertainty?
This study focused on the valuation of small life science companies applicable for characteristics typical in venture capital, exemplified by a case study company with negative earnings.
Within this scope, a literature study was performed and the best suitable valuation methods were chosen.
Capital budgeting practices in emerging market economiesAlexander Decker
This document discusses a study that investigated the capital budgeting practices of listed firms in Ghana. The study found that:
1) Listed Ghanaian firms adopt standard capital budgeting techniques in practice, most commonly using NPV, PBP, DPBP, and IRR. However, MIRR and ARR were less commonly used compared to NPV.
2) Most firms used the weighted average cost of capital (WACC) to evaluate investment projects.
3) Respondents had worked at their firms for varying durations, most commonly 4-7 years, and played a role in recommending or authorizing capital budgeting decisions.
This document summarizes a study that reexamines the impact of merger accounting methods on market reaction. The study finds:
1) Tax-free mergers using the purchase method exhibited significant positive abnormal returns over the period studied, consistent with prior research. These returns appear to originate in the period before the announcement.
2) Other variables not included in capital asset pricing models do not influence these results.
3) Tests found indirect cash flow effects, like leverage and income manipulation, were associated with the accounting method used, providing a partial explanation for abnormal returns in purchase method mergers.
- The document is a dissertation that examines short-term wealth changes for acquirers of public and private targets in Greece from 1998-2010.
- It finds that Greek acquirers of public targets experience an insignificant mean CAR of -0.28%, while acquirers of private targets earn an insignificant mean CAR of +0.98%.
- The author performs univariate and multivariate tests to examine factors that could explain the "listing effect" observed internationally, where acquirers earn positive returns for private targets and zero or negative returns for public targets.
Event study on the impact of mergers and acquisitionseleclasson
This document provides details on an event study examining the impact of mergers and acquisitions on stock returns. It includes a literature review on motives for acquisitions and prior empirical evidence. The study analyzes acquisitions by UK firms of domestic UK targets and cross-border EU targets from 2006-2010. The methodology section outlines using an event study approach with a 3-day event window around acquisition announcements and 200-day estimation period to calculate abnormal returns. Hypotheses test for no abnormal returns for acquirers and differences between domestic and cross-border deals.
- The document analyzes whether using Markit's dividend forecasting data to create portfolios based on forward dividend yield leads to higher returns compared to portfolios based on historical trailing dividend yield or benchmarks.
- A portfolio based on Markit's high forward dividend yield (HFDY) outperformed a similar portfolio based on trailing yield (HTDY) and the S&P High Yield Dividend Aristocrats index in terms of total returns over the sample period.
- HFDY had higher annual returns and information ratio, indicating it generated more return for the risk taken compared to the other strategies. However, the SPDA benchmark had the lowest volatility and highest information ratio of the strategies analyzed.
This document summarizes a research paper that studied the effects of initial public offerings (IPOs) on the long-run performance of stocks listed on the Nairobi Stock Exchange in Kenya. The study found that 51.5% of the variation in long-run stock performance was explained by factors like the difference between the offer price and closing day one price, firm age, size, number of shares issued, and subscription percentage. The regression model showed that these independent variables significantly predicted long-run performance. Specifically, differences in offer price vs. closing price, firm size, and number of shares issued positively impacted long-run performance, while firm age and subscription percentage had a negative effect. The paper concluded that firms should implement
A study on financial performance analysis at cee veeAKHILHARIDAS
This document provides an overview of the global and Indian footwear industry. It discusses the history of footwear dating back to ancient civilizations. India has a large livestock population and is one of the largest producers and exporters of footwear globally, especially leather footwear. The key products exported are leather footwear, footwear components, leather garments, and leather goods. The footwear industry is concentrated in certain regions and states of India like Tamil Nadu, Delhi, Agra and Kanpur. The document also provides statistics on India's annual footwear production capacity and imports.
Absolute and Relative VaR of a mutual fund.Lello Pacella
Calculated Absolute and Relative VaR using Varcov Approatch, Parametric with EWMA-estimated volatility, Historical Simulation and Filtered Historical Simulation.
Does the capital assets pricing model (capm) predicts stock market returns in...Alexander Decker
This document examines whether the Capital Asset Pricing Model (CAPM) can predict stock returns in Ghana using data from selected stocks on the Ghana Stock Exchange from 2006-2010. The results found no statistically significant relationship between actual and predicted returns, indicating CAPM with constant beta cannot explain differences in returns. It was also found that some stocks were on average undervalued while one was overvalued over the period studied. The conclusion is that the standard CAPM model cannot statistically explain the observed differences in actual and estimated returns of the selected Ghanaian stocks.
Capital budgeting is the process of evaluating long-term investment projects. It involves identifying, analyzing, and selecting projects whose cash flows extend beyond one year. Management must allocate limited resources between competing projects to maximize firm value. Common capital budgeting techniques include net present value, internal rate of return, payback period, and accounting rate of return. Early studies in the 1970s found that simpler techniques like payback period were most commonly used in practice. More recent foreign studies show increased use of discounted cash flow methods. Indian studies also found payback period is popular due to its simplicity, though discounted cash flow techniques are gaining prominence. Risk adjustment is typically done through sensitivity analysis, conservative forecasts, or adjusting discount rates.
The document summarizes a study examining the stewardship activities of the "Big Three" index funds - BlackRock, Vanguard, and State Street Global Advisors. The study finds that while index funds have the potential to be effective stewards due to their large ownership stakes, their stewardship efforts are limited by agency problems. Specifically, the Big Three devote minimal resources to stewardship and engage with a small minority of portfolio companies. Their focus on governance principles over performance and director qualifications may not be optimal for investors. Overall, the evidence is consistent with index fund stewardship being influenced by incentives to under-invest in stewardship and defer excessively to corporate managers.
Research Project - Active versus Passive ETFs - An alpha or beta product - Ch...Christopher Sanderson
This document provides an introduction and literature review for a research project comparing actively managed ETFs to passively managed ETFs. The introduction discusses what actively managed ETFs are, potential issues they face, and why the research is important. The literature review covers previous research on topics like the definition of active ETFs, their history, developments, performance comparisons to mutual funds and passive ETFs, and issues around transparency. The document provides context and background information for analyzing the performance of active ETFs.
This document provides an introduction and overview of mutual funds. It discusses the history and development of mutual funds in India, which started in 1963 with the formation of Unit Trust of India. It then describes the four phases of growth of the mutual fund industry in India from 1964 to the present. It defines what a mutual fund is and provides background on the concept and structure of mutual funds. The document aims to educate readers on mutual funds and their role in the financial system.
The CBS Television surprise hit “Undercover Boss” has aired for six consecutive seasons and
features publicly traded firms, closely-held corporations, and in some instances not-for-profit institutions. While
there has been much analysis on the ethical dilemmas faced by the undercover CEO or other executive, no
practical analysis of a firm‟s profitability has been conducted on any of the firms featured on the show.
Conventional wisdom would suggest that financial performance of a featured firm would improve after the initial
airing date, as the show typically ends on a „feel good‟ note and most often places the executive, as well as the
firm, in a positive light. This paper analyzes the stock market price after the initial air date as well revenue and net
income for all publicly traded firms that have appears on the show through the end of the sixth season.
The document discusses various considerations and methods for demand forecasting, including factors that influence demand forecasting, different levels and types of forecasts, historical and statistical analysis techniques, and Engle's Law on consumption patterns relative to income levels. Demand forecasting is important for organizations and economies to function efficiently, and there are multiple approaches that can be taken depending on the specific product, time horizon, and other contextual factors.
The document discusses how the ETF market is expected to evolve between now and 2020. Key points include:
- ETFs are expected to continue growing rapidly in size and importance globally as their footprint expands beyond the US into new markets and segments.
- More types of investors are expected to adopt ETFs, including institutions, advisors, and individual investors. New ETF products targeting different strategies will also proliferate.
- Service providers that help launch and distribute ETFs are likely to play a larger role as competition increases and fee pressures mount.
- Regulatory changes could further encourage growth, though some challenges like distribution issues may slow expansion in some regions.
- To compete successfully
How Vietnam Stock Returns Response to Events AnnouncementBang Vu
This document summarizes the background literature on event study methodology and its application to analyzing stock price movements in response to corporate announcements and events. It discusses how event studies have been widely used in academic finance to test the efficient market hypothesis and analyze issues like the relationship between stock prices and dividends. While event studies have been conducted on developed and emerging markets, this paper aims to be one of the first to apply the methodology to study how Vietnamese stock prices react to earnings announcements, rights issues, and other events over the past decade since the market opened.
Venture capital valuation of small life science companies by Salim Gabro & Ro...Salim Gabro
Life science companies are research-intense companies with a high level of unpredictability of the product development. This is due to high dependency on the success of clinical studies, regulatory affairs, and immaterial property, which makes the industry special in comparison with most other industries. Valuation becomes challenging looking at companies that are not publicly listed. What is the value of a company with no established market price and a high level of future uncertainty?
This study focused on the valuation of small life science companies applicable for characteristics typical in venture capital, exemplified by a case study company with negative earnings.
Within this scope, a literature study was performed and the best suitable valuation methods were chosen.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
1. STOCK OPTION BACKDATING :
THE FRENCH EVIDENCE
M€moire – Majeure Finance
Guillaume CHARTON
Fr€d€rick VELTEN-JAMESON
Under the supervision of Christophe PERIGNON
Group HEC
YEAR 2007-2008
2. 2
CONTENT
Introduction .......................................................................................................................................3
1. Sample selection and methodology............................................................................................6
1.1. Sample description...........................................................................................................6
1.2. Sample Classification .......................................................................................................9
1.3. Cumulative abnormal returns model................................................................................ 11
2. Empirical results............................................................................................................................13
2.1. Empirical results of our study.......................................................................................... 13
2.1.1. Unscheduled plans reject the hypothesis of backdating............................................... 13
2.1.2. Scheduled plans......................................................................................................... 14
2.2. A comparison with the Lie Paper..................................................................................... 15
2.2.1. Context of the paper................................................................................................... 15
2.2.2. Empirical Results:....................................................................................................... 15
2.3. Case Study: a stock option plan with strong suspicions of backdating: ............................ 17
2.3.1. How did we select it?.................................................................................................. 17
2.3.2. What is the pattern? ................................................................................................... 18
2.3.3. Other elements of suspicion:....................................................................................... 19
3. Interpretation............................................................................................................................ 21
3.1. A critical review of our methodology................................................................................ 21
3.1.1. Our Sample:............................................................................................................... 21
3.1.2. Our Abnormal Revenue Model.................................................................................... 22
3.2. The method of determination of the exercise price of a stock option plan ........................ 23
3.3. Corporate practices: a stock option plan is never granted to a CEO alone....................... 25
Conclusion ..................................................................................................................................... 27
Acknowledgment............................................................................................................................. 28
References...................................................................................................................................... 29
3. 3
Introduction
In the past fifteen years, stock options have gone from being the best incentive
and compensation tool for aligning the interests of managers and shareholders to
being vilified because of a string of scandals in corporate America as well as in
France concerning the granting (in terms of size and timing) and the exercise (in
terms of timing) of the stock options. They enable their holder to buy listed shares of
the company at a price close to the share price at the time of the grant ; the exercise
period starts a couple of years after the grant (the period between the grant and the
authorization of exercise is known as the vesting period), when hopefully the share
price will have undergone considerable growth, and the holder of the stock option will
make the profit between the share price and the exercise price.
In France, critics have mainly centred on the size of stock option plans for CEOs
and around the untimely exercise of options based on insider trading : a study
published in May 2007 showed that in 2007, 41% of the compensation of the CAC 40
CEOs resulted from capital gains derived from the exercise of stock options, wheras
it represented 18% in 20061
; in 2007, it was uncovered that before the brutal fall of
the EADS share price in mid-2006, a Dutch blue chip corporation listed on the French
stock exchange and part of the CAC 40, many top executives had exercised their
stock options, most likely on the basis of insider information.
In the United States, research has focused on the share price pattern of the
company at and around the time of the award or of the exercise of the company stock
options of CEOs. In 2005, Erik Lie, from the University of Iowa, published a
ground-breaking paper on the timing of the granting of stock options to CEOs2
and
showed that for a certain category of plans, the awarding ocurred on a date where the
1
Study published by L’Expansion on May 28, 2008 on the global compensation of the CAC 40 CEOs,
including salary, bonus, dividends, stock option capital gains and attendance allowances ; this showed that in
2006, the global compensation was of €102 million with €18.8 million attributed to capital gains from exercise
of stock options while in 2007 those figures were respectively €161 million and €66 million. It appears that
most CEOs exercised their stock options before August 2007 and the downturn of equity markets.
2
Erik Lie, On the Timing of CEO Stock Option Awards. 2005. Management Science. Vol. 51, No. 5, May 2005,
pp. 802–812
4. 4
stock price had shown negative abnormal returns before the date of the grant and
positive abnormal returns afterward. It is easy to understand that it is in the best
interest of the holder of a stock option to have the lowest exercise price and all the
evidence pointed to a wide use of backdating in the granting of stock option plans to
CEOs, whereby the grant was given ex post on a day where the share price – and
consequently the exercise price – was particularily low.
The Wall Street Journal published a series of articles on the subject in 2005 and
2006 and did its own study on the backdating of CEO stock options with a slightly
different and more simple methodology where it looked at the stock price pattern
around the grant dates and found that for seven companies, the awards had
repeatedly fallen on a day when the stock price was at its lowest. Whereas Lie’s
study did not point any fingers at suspected companies but established in a scientific
way the high probability of backdating, the Wall Street Journal named names which
provoked resignations within the six companies mentioned and inquiries first from the
regulator, then from the legal system.
Given the interest raised by the study in the United States and the fact that the
use of backdating seemed to be so widespread, we thought it would be interesting to
see if the conclusions of Lie’s study were applicable in France. To the best of our
knowledge, no such study has been conducted for the French market. The legal and
regulatory framework seemed to allow for backdating : there is no obligation to
disclose to the regulator that a stock option plan has been awarded, before the end of
the year whereas in the US this disclosure is required within two days of the grant
(before 2002, the disclosure was required within 30 days, allowing for time to
backdate). We therefore carried out this study on a sample of 34 companies taken
from the French blue chip index (the CAC 40) in its composition as of December 31,
2006 and over a period of ten years, from 1997 to 2006. Our findings show that there
is a striking difference between the pattern of the scheduled and the unscheduled
stock option plans, but show no evidence of backdating. From a regulatory point of
view, it is interesting to look at what may prevent backdating. The reasons seem to be
two-fold : first of all, stock option plans are rarely awarded to one individual, and
5. 5
when they are, it is not the CEO ; secondly, the fact that the exercise price is
calculated on a 20-day average of the stock price makes the use of backdating less
effective.
6. 6
1. Sample selection and methodology
1.1. Sample description
To start building a sample, it was necessary to restrict our field and focus on a
certain group of listed companies. The sample built for the study was not chosen on
the assumption that there would be a stronger likelihood of finding evidence of
backdating but simply because it was more likely that we would find all the
information needed to extract the results of the study. The sample therefore consists
of all the companies of the CAC 40 who (i) are incorporated under French law, and (ii)
have awarded stock options to their employees and/or executives. Information was
taken from the yearly registration documents the companies have to file with the
French regulator (the Autorit€ des March€s Financiers or AMF). The years covered
are 1997 to 2006 : the late 1990’s corresponds to the period when stock option plans
became more widely used and 1997 seemed an adequate start; when we started
collecting data, the registration documents for year 2007 had not yet come out.
For a typical stock option award, the following information was collected :
Table 1 - sample information collected for one plan
Company ACCOR
Date of the grant 08/01/2002
Unadjusted exercise price 37,77 €
Total number awarded 3 438 840
to "mandataires sociaux" 435 000
to ten first beneficiaries excl. above 290 000
Number of beneficiaries 2 032
Exercise price calculation method for grant 95% of 20-d avge.
Date of EGM authorization 29/05/2001
Length of authorization (mths) 38
Content of authorization on exercise price min 80% of 20-d avge.
Cap on number of stock options 5% of total shares
Subscription / Acquisition Subscription
The exercise price may be adjusted on the occurrence of certain events having an
effect on the underlying security of the option, such as the payment of a high dividend
(one occurrence in our sample), a stock split, a stock consolidation… This is why the
unadjusted exercise price is needed.
Out of the total number of stock option awarded, the company must disclose the
7. 7
number awarded each year to the mandataires sociaux (legally, these are the
executives that have the ability to represent the company : directeur g€n€ral and
directeur g€n€ral d€l€gu€ for a soci€t€ anonyme) and the number awarded to the ten
largest benefeciaries who are not mandataires sociaux.3
These figures give us an
idea of whether executives are very concerned by the stock option plan or not.
Under French law, the exercise price of a stock option must be equal to at least
80% of the 20-day average of the stock price on the day preceding the grant.
However, the discount to the 20-day average of the stock price may be limited by the
Extraordinary General Meeting (EGM) of the shareholders of the company which
gives the authorization to the board of directors of the company to launch a plan. The
board of directors may also choose to limit the discount.
Lastly, a stock option plan may enable the holder of the option to subscribe to new
shares that would be issued by the company upon exercise of the option – in this
case it is legally coined as a plan d’option de souscription d’actions – or acquire
existing shares that would be remitted by the company – in this case, the plan is
known as a plan d’option d’acquisition d’actions. This is important for the calculation
of the exercise price, as we will see below.
A summary of the sample is shown below :
Table 2 - sample description
Number of companies 34
Number of stock option plans 435
Number of grant dates 414
Out of the 40 companies making up the CAC 40, six were excluded for the
following reasons :
(i) either they were registered under a law other than the French one : Arcelor
(Dutch law), Dexia (Belgian law), EADS (Dutch law) and ST Microeletronics
(Dutch law) ; the methods of granting plans and calculating the exercise
3
For the sake of clarity, the terms ‘mandataires sociaux’ and ‘executives’ will be used indistinctively in this
study, when referring to a French company.
8. 8
prices are specific to French law and French law applies only to companies
registered under French law ; therefore keeping these companies in our
sample would have rendered our data inconsistent ;
(ii) or they were French but no stock options were granted : GDF and EDF.
The contribution of each company in terms of stock option plans is very different as
it ranges from a low of one to a high of 51. The breakdown of number of plans per
company is as follows :
Table 3 - breakdown of plans per company
Company Number Fraction
ACCOR 11 2,53%
AIR FRANCE KLM 1 0,23%
AIR LIQUIDE 11 2,53%
ALCATEL LUCENT 51 11,72%
ALSTOM 9 2,07%
AXA 21 4,83%
BNP PARIBAS 11 2,53%
BOUYGUES 14 3,22%
CAP GEMINI 11 2,53%
CARREFOUR 13 2,99%
CREDIT AGRICOLE 7 1,61%
DANONE 28 6,44%
ESSILOR 20 4,60%
FRANCE TELECOM 1 0,23%
L'OREAL 22 5,06%
LAFARGE 15 3,45%
LAGARDERE 10 2,30%
LVMH 17 3,91%
MICHELIN 9 2,07%
PERNOD RICARD 13 2,99%
PEUGEOT 8 1,84%
PPR 19 4,37%
RENAULT 12 2,76%
SAINT GOBAIN 10 2,30%
SANOFI AVENTIS 5 1,15%
SCHNEIDER 16 3,68%
SOCIETE GENERALE 11 2,53%
SUEZ 11 2,53%
TOTAL 9 2,07%
UNIBAIL RODAMCO 10 2,30%
VALLOUREC 2 0,46%
VEOLIA 6 1,38%
VINCI 11 2,53%
VIVENDI 10 2,30%
Total 435 100,00%
9. 9
1.2. Sample Classification
As mentioned above, stock option plans may be of two types : subscription plans
or acquisition plans. A breakdown of the two types of plans follows :
Table 4 - Subscription / Acquisition
Type of plan Number Fraction
Subscription 281 64,6%
Acquisition 149 34,3%
Unknown 5 1,1%
Breakdown / year Subscr. Acqu. Unknown Total
1997 19 9 0 28
1998 16 17 0 33
1999 17 24 0 41
2000 23 26 0 49
2001 32 21 0 53
2002 30 13 1 44
2003 33 13 0 46
2004 34 8 1 43
2005 42 9 2 53
2006 35 9 1 45
Subscription plans are larger in number and more advantageous for a company :
in the case of acquisition plans, at the end of the vesting period of a specific option
plan, the company needs to buy the amount of shares corresponding to the amount
to be delivered if all the options were exercised (even if the stock option plan is out of
the money). This means a certain amount of capital must be used for the purpose
and if the stock price is going down, the options will likely not be exercised and the
company will have to sell the stock on the market at a loss ; furthermore, a company
may not own more than 10% of its shares and this would naturally limit the amount of
stock options to be handed out to employees and executives. On the other hand, a
subscription plan means dilution for existing shareholders, but as the EGM usually
leaves it up to the board of directors to choose whether a grant is a subscription plan
or an acquisition plan it is normal that almost 65% of the plans are subcription ones.
Another fundamental difference could have had a more direct implication for our
study. As explained above, the exercise price is calculated on the basis of the 20-day
10. 10
average of the stock price on the day before the stock-option grant. Legally, it cannot
be lower than 80% of this average but usually it is limited at 95% or 100%. However,
for acquisition options, there is a second constraint : the exercise price must be
above 80% of the average acquisition price of the shares held by the company
(including the ones bought in the process of a share repurchase plan). This means
that in a period of falling stock prices, there will be more incentive to grant
subscription plans rather than acquisition ones because the exercise price of
acquisition plans would be limited by the second restriction. (Table 4 above shows
that 2001, a year of sharp decrease of the equity markets, is the first year where
there are more subscription plans than acquisition plans.) This also means that the
exercise price of an acquisition option might be above the 100% of the 20-day
average and actually disconnected from the 20-day average criterion, which would
then cancel the utility of backdating. However, we checked for possible different
patterns between the subscription and acquisition option plans and there was no
significant difference.
A second classification forms the basis of the whole study on backdating. It is the
separation between scheduled and unscheduled stock option plans. A scheduled
plan is defined as occurring within ten days of the one-year anniversary of the prior
year’s plan and unscheduled if not.
For the year 1997, it is therefore not possible to define unscheduled or scheduled
plans. These plans were taken out of the study, as well as the plans awarded on the
same day in the same company: in certain cases, there is a double plan because of
the granting of one subscription and one acquisition plan. In other cases, there is no
easy explanation at hand for these double plans, especially that the exercise price
can be different though the stock option plans are awarded on the same day. An
explanation may lie in the fact that these stock option plans do not concern the same
people ; the following is an interesting example :
11. 11
Table 5 - two plans awarded on the same day
Company plan 1 plan 2
Date of the grant 14/05/2001 14/05/2001
Unadjusted exercise price 66,00 € 61,77 €
Total number awarded 1 105 877 552 500
to "mandataires sociaux" 0,00% 81,50%
to ten first beneficiaries excl. above 0,00% 18,50%
Number of beneficiaries 44 669 4
Discount/premium to 20-day average 0,82% -5,64%
Subscription / Acquisition Acquisition Acquisition
The basis of the separation is to see if there is a difference in patterns between
both plans, as the scheduled are much less likely to be backdated than the
unscheduled ones. The breakdown between scheduled and unscheduled plans and
year by year is as follows :
Table 6 - Unscheduled / Scheduled plans - total / across time
Unscheduled Scheduled Double Unknown Total
Total 214 159 17 45 435
% 49% 37% 4% 10% 100%
1997 0 0 0 28 28
1998 18 12 0 3 33
1999 22 16 1 2 41
2000 26 15 3 5 49
2002 26 15 0 3 44
2003 21 20 3 2 46
2004 21 22 0 0 43
2005 26 25 1 1 53
2006 25 17 2 1 45
1.3. Cumulative abnormal returns model
The idea is to examine how the share price of the company performs around the
stock option grant date, but adjusted to reflect the performance of the market.
Lie’s study examines the cumulative abnormal returns from 30 dealing days before
the grant to 30 dealing days after. These are calculated as the cumulative sums of the
differences between the daily stock returns and the predicted daily returns of the
stock price as derived from the three-factor model of Fama and French (1993), the
idea being that the result is different for scheduled and unscheduled stock option
12. 12
plans.
Our model is simpler : we calculate the cumulative sums of the differences
between the daily stock returns and the daily returns of the CAC 40. This is loosely
based on the Capital Asset Pricing Model, but without adjusting for the beta of each
stock.
The choice of the 30 dealing days for Lie’s study is guided by the fact that before
2002, US company’s had to declare the grant date of a stock-option plan with the
regulator within 30 dealing days of the given grant date, thereby limiting the length of
time between the chosen grant date and the date of the choice of the grant date. In
France, there are two kinds of reportings. The legal framework requires the company
to inform every year its shareholders, during the general meetings, in a rapport
sp€cial of the board of directors, of the stock option grants that occurred during the
year4
; however, this report is only available at the time of the general meeting and
only to shareholders. The regulatory framework requires that the same information
given in the rapport sp€cial be included in the document de r€f€rence (similar to the
registration document), a document companies usually publish every year and that is
available on the website of the regulator5
. This document must be published five
months at the latest after the end of the accounting year, and usually takes into
account all important events that could have occured between year-end and the
publication of the document, including the stock-option plans granted after year’s end
and before publication of the registration document : this means that a maximum of
one year could occur between the grant date and the publication of it, easily allowing
for backdating.
4
Articles L 225-177 and L 225-186 of the Code de Commerce
5
Article 212-1 et s., R‚glement gƒnƒral de l’AMF
13. 13
2. Empirical Results
In this section, we will highlight the main empirical results of our study and
compare them with the results obtained by Erik Lie. Overall, it appears that the return
patterns we found for any of the categories Lie introduced (scheduled as well as
unscheduled) are not similar to those he pointed to in his 2005 study. This means that
as far as backdating is concerned, France, or at least French blue chip companies
did not resort to backdating stock option grant dates (the potential reasons will be
explained in part 3).
2.1. Empirical results – French study
Figure 1. Cumulative Abnormal Stock Returns Around Stock Option Grants
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
-30 -26 -22 -18 -14 -10 -6 -2 2 6 10 14 18 22 26 30
Daysrelative to option grant
Scheduled Unscheduled
Note : Abnormal returns are calculated as the stock return on the day minus the CAC40 return on the day
2.1.1. Unscheduled plans reject the hypothesis of backdating
The most interesting feature of unscheduled plans is that companies are free to
grant these stock options on this particular day and therefore could have chosen a
different day. If we look at the abnormal pattern of these plans we can see that they
14. 14
were issued on average after the shares of the companies went up 2% relative to the
CAC40 index during the month before the grant date. Even more surprising, they
were granted at a maximum over the month preceding the grant date. If we accept
that options are granted with a strike close to the price as of the date of the grant (or
at least very close to the 20-day stock moving average), this was quite unfavourable
to the holders of such stock options, as they missed the rise of the stock price before
the grant date.
However we still remark an ascending pattern over the 30 days following the
grant. This means that there is an immediate profit (yet unrealized, as stock options
always have a multi-year vesting period) on the month after the grant. Does this
mean that companies backdated the grant of stock options? We think not as the
pattern lacks the perfection in the timing that backdating can provide. It reinforces
however the intuition, that companies are opportunistic when it comes to granting
unscheduled stock options. This rising pattern, compared to the relatively flat shape
of scheduled plans, is a clue that unscheduled plans will be more probable when the
stock price is rallying up, on the back of strong positive momentum (i.e. the belief that
if the stock has risen over a defined period, it will continue to do so in the future). This
is a sign, we think, that these plans are set proactively (companies betting on the rise
of their stock price) rather than retroactively (trough backdating)
Consequently, we can suggest that backdating is neither a generalized
phenomenon – otherwise the abnormal pattern would be V-shaped – nor a well
mastered practice by companies, as they consistently miss out on an important part
of the stock price performance before the grant.
2.1.2. Scheduled plans
In Lie’s study, an award is classified as scheduled if it occurred within one week
of the one-year anniversary of the prior year’s award date. Companies don’t have the
freedom to set the date (either proactively or retroactively). This is the comparative
part of the sample. Here we cannot see any particular trend. The V-shape of the
pattern exists but is not centered on the grant date. The return in excess of the CAC
15. 15
40 (i.e. what we call abnormal return) is mainly negative but becomes positive around
20 days after the grant.
2.2. A comparison with the Lie Paper
2.2.1. Context of the paper
In 2005, Lie published a study on stock returns around stock option grant dates. It
followed a series of article on the same topic, but proposed a rather different
explanation to the fact that stock returns around grant dates are significantly positive.
Yermack (1997) examined the stock returns around 620 stock option awards to CEOs
between 1992 and 1994. He found that, while the returns on the days leading to the
award were normal, the stock returns during the 50 trading days afterward exceeded
those of the market by more than 2%. He attributed this abnormal and systematic
return to the fact that executives were opportunistic in granting stock options, by
timing them before anticipated stock rises. Aboody and Kasznik (2000) focus on
scheduled awards (i.e. where there is no possibility of opportunistic behavior) and
found that the returns before the awards were statistically undistinguishable from
zero. However, they interpreted the fact that the return on the 30 days after the grant
was almost 2% and proposed as an explanation that executives time the release of
information around fixed option awards opportunistically. Lie (2005) then studied a
sample of 5,977 CEO stock option awards by US companies between 1992 and 2002.
We will now compare his findings with the results we found based on the 34
companies part of the CAC40.
2.2.2. Empirical Results:
Lie found a very interesting pattern for unscheduled stock option grants (based
on 1,446 unscheduled awards). On average, the stock abnormal return (i.e. the
return in excess of the one predicted by the Fama and French three-factor model,
was -3% on the 30 days leading to the stock option grant. On the 30 days following
the grant, Lie found a sharp reversal in the stock abnormal return pattern (+2% on the
next 10 days and another 2% on the next 20 days). This leads to a V-shape curve as
16. 16
presented below.
Figure 2. Cumulative Abnormal Stock Returns Around Stock Option Grants,
Lie (2005)
Source: Lie (2005)
As one can see, the pattern is very clear (unlike ours). The timing of the grant is
perfect, the stock options being attributed at the low point over the 60 days around
the grant date. This is why we argued that the pattern of the cumulative abnormal
returns of our unscheduled stock options lacked the perfection that backdating can
offer, although the return is positive on the days after the grant (see figure 1). The
perfection of the timing (stock options granted on the date where the stock price is at
its lowest point) made Lie rule out the explanation that executive were proactively
anticipating a rise of the share price and therefore setting up stock option plans.
Another finding of the Lie paper was that companies had been more and
more efficient at timing their plans overtime (as shown in figure 3 below) :
17. 17
Figure 3. Cumulative Abnormal Stock Returns Around Stock Option Grants,
Lie (2005)
Source: Lie (2005)
2.3. Case Study: a stock option plan with strong suspicions of
backdating:
Although our aggregated results seem to reject the hypothesis that backdating is
used in France by companies of the CAC 40, we tried to find an individual plan where
the V-shaped pattern exists and looks flagrant.
2.3.1. How did we select it?
We acknowledge that the Cumulative Abnormal Return model is very useful to
assess whether a plan could have been backdated. However we chose an even more
simple approach to identify suspicious plans, by simply looking at the price pattern
around the grant date. The rationale of opting for this method is that it is likely to be
what the executives were looking at when they granted the plan. One was particularly
striking (see figure 4)
18. 18
2.3.2. What is the pattern?
If we rebase the share price as of D-30: the share price declined 60% to reach 40
on the day of the grant and bounce back by 125% to 90 over the 30 days after the
grant. In this operation, the beneficiaries achieved a 63% performance. Note that the
performance of the stock option is different from the performance of the stock (125%)
as the strike price is not equal to 40 (i.e. the share price on the day of the grant) but to
54 (the average on the 20 days before the grant). If we now look at the cumulative
abnormal returns, we find a pattern similar to a V-shape.
Figure 4. Selected Plan: Share price evolution around stock option grant
0
20
40
60
80
100
120
-30 -27 -24 -21 -18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27
Note: basis 100 at D-30 before grant
19. 19
Figure 5. Selected Plan: Cumulative Abnormal Return around Grant Date
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
-30 -27 -24 -21 -18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27
Daysrelative to option grant
It is impossible to say whether the timing of this specific grant is the result of lucky
timing or of backdating.
2.3.3. Other elements of suspicion:
Let’s now have a look at the features of the plan. We could suppose that
backdated plans are more likely to concern a relatively small number of people (the
smaller, the easier it is to backdate and the easier it is to keep the process
confidential). Top executives who have the power to grant stock options and who
therefore could have an incentive to backdate stock option awards, are also very
likely to be beneficiaries. In the case of this plan, there were 16 beneficiaries.
Unfortunately we have no information on whether the 16 people belong to top
management and the fact that the number of options granted (30,500) is fairly small
relative to previous and following plans makes it an unlikely candidate for a
top-executive only plan.
To conclude, there is relatively strong evidence that the conclusions of the Lie
study on the timing of stock option awards are not applicable to the French market, at
Grant Date
20. 20
least for the CAC 40 index. The possible reasons that could explain that our findings
differ from Lie’s are the object of the next section.
21. 21
3. Interpretation
In this section we will try to find elements of explanation for the fact that our
findings on the CAC 40 differ from Lie’s results in the US. We will first discuss our
methodology (the quality of our sample and our abnormal return model) which slightly
differs from the one Lie used. Then we will try to find elements of the French
regulation and customs on stock option grants that could have prevented companies
to backdate stock option awards.
3.1. A critical review of our methodology
3.1.1. Our Sample:
Two features of our sample may be criticized. First, the relatively small size of our
sample could limit the conclusions one can draw from it. Our sample consists of 435
plans granted by 35 companies from 1997 to 2006, of which 158 are classified as
scheduled and 214 as unscheduled. This seems relatively small compared to the
sample used by Lie in his study, which studied 5,977 stock option awards from 1992
through 2002, 1,668 of which are classified as unscheduled and 1,426 as scheduled.
But we do not think it is a major obstacle as if backdating existed massively it should
have appeared in our sample.
The main feature we see as a possible shortcoming is the big cap bias of our
sample. The 35 companies we studied were all constituents of the CAC40, the
French blue chip index, as at December 31, 2006. Therefore the average size of the
company of our sample is likely to be greater than the average size of the company in
the sample used by Lie. Why does this matter ? We see at least two reasons. First,
the bigger a listed company the more it comes under the scrutiny of the French
market regulator and of its auditors. As individual investors are more likely to invest in
these large companies and as it is one of the mandates of the AMF to protect
individual minority shareholders, CAC40 companies are likely to be more monitored
by the AMF. This means that the risk of being caught increases which can deter
managers from the temptation of backdating. There is also greater scrutiny from
auditors. One reason could be that they fear to be associated with a stock option
22. 22
related scandal that would mean legal risks and negative press coverage for them.
These two factors, combined with the corporate scandals of the past years, have
contributed to stricter corporate governance rules for large-cap companies. The
second explanation to the unlikelihood of backdating in large companies is more
organizational. We tend to think that the power and responsibilities are less
centralized in the hands of a few top managers than in smaller businesses. Our talks
with the legal departments of listed companies confirmed our intuition : given the
number of people involved in a board of directors decision, an attempt to backdate is
likely to be reported through whistle blowing procedures). Therefore, CAC40
companies make relatively poor candidates for backdating. However, they were the
ones for which we could collect the most information and that is why we chose to
study them. Further studies may be carried out on smaller companies where
corporate governance standards may be not as high and where regulatory and media
pressure would be weaker.
3.1.2. Our Abnormal Return Model
The model we chose has an undeniable advantage, the one of simplicity. We
calculate abnormal returns as the excess return of the stock compared to the return
of the market. The underlying assumption is that every company has a beta equal to
one and that the CAPM model holds. This is a very simplifying assumption, as beta
can vary a lot from a company to another and as the beta of a given company can
vary overtime. What are the consequences of this assumption? The main one is that
the value of abnormal returns are overestimated or underestimated compared to a
traditional CAPM model. Let us take an example. If on a given day the stock and the
market vary in the same direction, it the beta of the stock is superior to one, the
absolute value of the abnormal return will be overestimated. However this is
compensated in cases where the stock price and the market do not move in the same
direction. Therefore, we cannot say if this assumption could really impact the overall
meaning of our results, compared with a more traditional CAPM model. The model
used by Lie is far more refined that ours. This may have an impact on our results and
23. 23
redoing our analysis with a more elaborated model like the one used by Lie, the three
factor model of Fama and French (1993), could be eventually the object of a next
study.
3.2. The method of determination of the exercise price of a stock option
plan
We believe that the method of determination of the exercise price for a stock
option plan partly explains the absence of backdating for the studied companies.
Whereas in the United States, the exercise price is usually set as the closing price of
the stock on the day the stock options are granted, in France it is calculated on the
basis of the 20-day average of the closing prices of the stock, with or without a
discount which may go to 20%. However the discount is rarely below 5% for the three
following reasons :
(i) any part of the discount which is below 95% of the 20-day average of the
stock price is taxed as a salary and not as capital gains at the time of the
exercise ; this also means that the company accounts for it as a salary and
this comes with various social taxes ;
(ii) since 2002, companies must account for stock option plans as a cost in their
P&L, at the fair value of the options, and granting an option in the money
greatly increases the cost of them ;
(iii) advisers and proxy services such as Proxinvest or ISS have raised
awareness about the cost of such options and a shareholder is not likely to
appreciate the granting of stock options in the money.
The 20-day average rule simply means that there is a greater lag in the
effectiveness of backdating. Consider that from one day to another, a stock price
drops 10%. Whereas in the United States the exercise price would consequently drop
by 10% from one day to another, in France, the one-day return will only contribute for
5% of the 20-day average. In the American case, it is easy to imagine a board of
directors delaying the decision because on a particular day there will have been a
sharp increase in the stock price. One could argue that because in France there is a
24. 24
larger lapse of time between the granting and the disclosure of the granting of a plan,
backdating would still be possible : within two or three months of a chosen grant date,
a company could look at the past 20-day average and choose the lowest point as
date of the grant. This is possible ; however, in the first place, the longer the lapse of
time between grant date and decision of grant (the backdating period), the larger the
risks in terms of discovery of the backdating. Secondly, the 20-day average virtually
eliminates local backdating, which could be defined as a backdating period of one to
five dealing days. Lie’s study proves that the cumulative abnormal pattern of
backdating still exists after 2002, for companies who file the stock option grant within
a period of 2 dealing days and for those who exceed the regulatory 2 dealing days
disclosure requirement : local backdating becomes ineffective thanks to the 20-day
average rule. It could be argued that the use of such a rule in the United States, in
conjunction with the disclosure rule could hinder even more the use of backdating. In
effect the 2-day disclosure rule is a heavy process for the regulator and the company
reporting, and the fact that some companies file their disclosures late proves that it is
sometimes not well respected.
We conducted a check on the use of the 20-day average and the data was
consistent with the use of it, though the applied discount was not always consistent
with the one announced :
Table 7 - 20-day average and discount / premium
Undeterminable 70 16,09%
Determinable 365 83,91%
Discount / of which % of of which % of of which % of
premium Count % of total Subs. range Acqu. range Unkn. range
[-1%; +1%] 219 60,00% 145 66,21% 70 31,96% 4 1,83%
]+1%; +5%] 43 11,78% 30 69,77% 12 27,91% 1 2,33%
]+5%; +20%] 11 3,01% 5 45,45% 6 54,55% 0 0,00%
[-5%; -1%[ 39 10,68% 23 58,97% 16 41,03% 0 0,00%
[-10%; -5%[ 44 12,05% 22 50,00% 22 50,00% 0 0,00%
[-20%; -10%[ 7 1,92% 5 71,43% 2 28,57% 0 0,00%
For 16% of the stock option plans, especially the ones from the late 1990s, the
information was not sufficient to run a check on the use of the 20-day average
25. 25
(probably because only the adjusted exercise price was given). For 84% of the plans,
the exercise price is within a range of 80% to 120% of the 20-daye average and in
over 80% of those cases the applied premium or discount varies from 5% to -5%.
3.3. Corporate practices: a stock option plan is never granted to a CEO
alone
In conducting our survey of the stock option plans granted by the CAC 40
companies, we realized that there are only seven instances out of the 435 stock
option grants studied where the only beneficiary or beneficiaries are the executives of
the company. And the study of the patterns of cumulative abnormal returns around
the grant dates of the stock option plans does not show any trace of backdating :
Figure 5. Grant for which executives are the only beneficiairies
Cumulative abnormal return
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
Daysrelative to option grant
22/01/98
26/03/98
22/12/98
28/05/01
17/12/02
07/07/04
25/04/06
It is simply not customary in France to grant stock option plans only to executives.
We suppose that this can be attributed to the French corporate cultural mentality
around high compensations of chief executives, which are considered as
26. 26
outrageous ; handing out the same kinds of compensations to others (though not the
same quantity) would be seen as a fairer practice. We believe these views on
executive compensation remain strongly embedded in France and should not be
underestimated.
The following table gives an idea of the number and nature of beneficiaries of the
sample of stock option awards used for this study :
Table 8 - number of beneficiaries
Maximum 58 957
Minimum 1
Number of Number of % of
beneficiaries plans total
1 18 4,14%
2 to 5 18 4,14%
6 to 20 24 5,52%
21 to 50 31 7,13%
51 to 100 24 5,52%
101 to 1,000 182 41,84%
over 1,000 96 22,07%
unknown 42 9,66%
Total 435 100,00%
Table 9 - share awarded to executives
Number of % of
Share plans total
none 113 25,98%
]0%; 20%] 145 33,33%
]20%; 40%] 82 18,85%
]40%; 60%] 13 2,99%
]60%; 80%] 7 1,61%
]80%; 100%[ 5 1,15%
all 7 1,61%
unknown 63 14,48%
Total 435 100,00%
The fact that a stock option grant is awarded to a larger number of people naturally
enables to prevent backdating as there would be a larger number of people involved
in the receipt of stock options days, weeks or potentially months after the date
chosen as the stock option grant date.
Furthermore, we could argue that it is hardly imaginable that executives
backdating would want to take the risk for others.
27. 27
Conclusion :
Through the study of 435 stock option plans awarded by 34 companies and over a
period spanning the years 1997 to 2006, we have shown that there is no evidence of
backdating in the choice of the granting date of stock option plans. However, we
uncovered an interesting and significant pattern in the cumulative abnormal returns of
unscheduled stock option plans that shows that these plans are opportunistically
timed before an increase in the share price of the company. Though there might be
some drawbacks in our model, this absence of backdating has three main
explanations : our sample is one of large companies from the French blue chip index,
where standards of corporate governance are definitely stronger than in small and
medium companies (the latter made up the bulk of Lie’s study); the 20-day average
rule for the determination of the exercise price of the stock options contributes to
making the use of backdating ineffective; and finally, the fact that stock options are
very rarely granted to a CEO alone limits the risk/reward aspects of the backdating
process.
We believe that the study of the granting of stock options in France could be
pursued by further studies. First of all, it would be precious to widen the sample to
include mid- and small-cap companies listed in France. This would provide a larger
sample as well as a test sample to see if the cumulative abnormal returns patterns
differ or not from that of this study. Furthermore, the cumulative abnormal returns
model could be improved, either by including the beta or the three-factor Fama and
French model. A third area of improvement would be in the interpretation of the
positive cumulative abnormal returns following the grant of stock options : a study
based on the voluntary disclosures policy of the companies before and after the grant
date might yield interesting results.
28. 28
Acknowledgment
We thank Christophe P€rignon, who first introduced us to the studies of Lie and
the practice of backdating of stock option plans, and encouraged us to pursue this
study.
29. 29
References
Erik Lie. 2005. On the timing of CEO stock option awards. Management Science. Vol.
51, No. 5, May 2005, pp. 802–812
Aboody, D., R. Kasznik. 2000. CEO stock option awards and the timing of corporate
voluntary disclosures. J. Accounting Econom. 29, 73-100
Yermack, D. 1997. Good timing: CEO stock option awards and company news
announcements. J. Finance. 52 449-476
Wall Street Journal, March 18 2006, The Perfect Payday – Some CEOs reap millions
by landing stock options when they are most valuable; Luck – or something else?,
C. Forelle & J. Bandler
Wall Street Journal, May 6 2006, Backdating Probe Widens as 2 Quit Silicon Valley
Firm – Power Integrations Officials Leave Amid Options Scandal; 10 Companies
Involved So Far, C. Forelle & J. Bandler
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