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Managerial gaming of stock and option grants
Author(s) -
Tian Yisong S.
Publication year - 2017
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12081
Subject(s) - equity (law) , stock (firearms) , business , stock price , stock options , economics , finance , political science , geography , paleontology , law , biology , archaeology , series (stratigraphy)
In this paper, we examine managerial gaming of different types of equity grants, both at the initial award of the equity grants ( front‐end gaming ) and the unwinding of the equity holdings in the future ( back‐end gaming ). We find that the potential gains from stock price manipulation vary substantially across different types of equity grants. While traditional stock option grants are less vulnerable to front‐end gaming, they are more vulnerable to back‐end gaming than other types of equity grants (e.g., restricted stock grants). To prevent or discourage managerial gaming, firms should preset all terms of the equity grant in advance and link its future payoff to average stock prices (e.g., by granting Asian stock options).