Exercise price regulation and the timing of ESO reports: evidence from China

Purpose - Prior research has documented that managers take opportunistic timing activities to influence the exercise prices of executive stock options (ESOs). This paper aims to add to the literature by investigating whether such behavior is mitigated by the exercise price regulation of China. Design/methodology/approach - Using a sample of 132 ESO reports between 2006 and 2010 in China, the authors explore whether the regulation takes effect by examining stock price movements and companies' information disclosures around the report dates. Findings - Consistent with the conjecture that the regulation could not effectively limit managers' opportunistic behavior, the authors find that the abnormal returns decrease slowly until ten trading days before the report dates, increase gradually subsequently, and rise dramatically just after the report dates. Particularly, the return pattern is more pronounced when corporate governance is weaker. The authors also find that managers opportunistically time ESO reports based on their private information. In particular, more (less) favorable (negative) news announcements occur after the report dates than beforehand. Additionally, compared to earnings announcements, managers prefer to time ESO reports with information about forward-looking earnings and security issuances. Originality/value - These results suggest that the regulation could not effectively constrainmanagers from influencing the exercise prices. The paper also provides evidence that imperfect regulations under asymmetric information may lead to additional agency costs, especially when corporate governance is weak. The authors' findings can contribute to the improvement of regulations on ESOs.