Detecting Managerial Opportunism in ESO Reports Based on Big Data

Prior literature provide strong evidence that managers implement opportunistic behavior to depress the exercise price of executive stock options (ESOs) in U.S. listed companies. This paper aims to investigate whether such opportunistic behavior also exists in China. Since Chinese equity incentive regulation uses the stock price before ESO’ report date as the pricing benchmark for the exercise price, we detect managerial opportunism by observing the stock returns surrounding the dates of ESO incentive plan report. Using the data of Chinese listed companies that reported ESO incentive plan from 2009 to 2015, this paper find that the cumulative abnormal returns is significantly negative before the ESO plan reported and significantly positive afterward, indicating that stock price decrease prior to the report dates of ESO plan and increase afterward. The V-shaped pattern of stock price movement around ESO report dates indicates that there are obvious opportunistic behaviors in the exercise price determination process of executive stock options. Regulators should make a longer time window as the pricing benchmark for ESO’ exercise price so as to prevent top managers from manipulating exercise price of their options.