The HLS Program on Corporate Governance released a new study today called Lucky Directors, by Professor Lucian Bebchuk and co-authors Yaniv Grinsten and Urs Peyer suggesting that outside directors' options, and not only executives' options, have been favorably timed to an extent that cannot be explained by mere luck.
The timing of executives' options has recently received a great deal of media and academic attention, forcing dozens of executive departures and financial restatements. But the option grants awarded to outside directors have received little attention by comparison.
The new study finds that, out of all director grant events during 1996-2005, nine percent were "lucky grant events" - falling on days with a stock price equal to a monthly low. The study estimates that about 800 lucky grant events were timed opportunistically, and that about 460 firms and 1400 outside directors were associated with grant events involving such timing.
The study identifies a link between directors' and executives' luck. Director grants were more likely to be lucky when executives and especially the CEO also received a grant on the same date. Grants not coinciding with an award to executives were more likely to be lucky when the CEO got a lucky grant in the current or preceding year.
The study also shows that director grants were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal and when the board did not have a majority of independent directors.
"Our findings are relevant for understanding the scope and causes of option timing practices," said Bebchuk. "They are also relevant for identifying the conditions under which outside directors can perform best."
Last month the Program on Corporate Governance issued Lucky CEOs, a study by Bebchuk and his co-authors on the backdating of CEO option grants. Bebchuk's earlier work on executive pay includes his 2004 book (with Jesse Fried) Pay without Performance: The unfulfilled Promise of Executive Compensation.