Corporate News Releases and Equity Vesting Alex Edmans London Business School, Wharton, NBER, CEPR, and ECGI Luis Goncalves-Pinto National University of Singapore Yanbo Wang INSEAD Moqi Xu London School of Economics This Draft: November 18, 2013 Abstract We show that CEOs strategically time the release of corporate news to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior and thus unlikely to be driven by the current information environment. We find that, compared to non-vesting months, firms release 12.5% more news during the months in which CEOs restricted pay is pre-scheduled to vest. We also find a reduction in news releases both one month prior to vesting and two months after vesting. News releases lead to a temporary run-up in stock prices and trading volume, potentially resulting from increased investor attention or reduced information asymmetry. This allows the CEO to cash out at a higher price and in a more liquid market. JEL Classification: G11, G23, G30, G32, G34. Keywords: Voluntary Disclosure, Equity Vesting, CEO Incentives, Insider Trading. aedmans@london.edu, London Business School, P-225, Regent s Park, London NW1 4SA. lgoncalv@nus.edu.sg, NUS Business School, 15 Kent Ridge Drive, MRB 7-43, Singapore 119245. yanbo.wang@insead.edu, INSEAD, Boulevard de Constance, F-77305 Fontainebleau, France. m.xu1@lse.ac.uk, London School of Economics, Room OLD M2.12, UK - WC2A 2AE, London.
1 Introduction This paper shows that the vesting schedule of the CEO s compensation contract affects his timing of corporate news releases. In particular, we find that CEOs release more news in months in which they have significant vesting equity. Such disclosures lead to an increase in both the stock price and trading volume, allowing the CEO to cash out at a higher price and in a more liquid market. CEOs incentives to increase disclosure can stem from two channels. First, it can attract investor attention, which previous research has shown to temporarily increase stock prices. For example, Barber and Odean (2008) argue that investors need to browse through thousands of stocks when making a buy decision, but do not face the same search problem when selling as they tend to sell only stocks they already own. As a result, investors become net buyers of attention-grabbing stocks, which can in turn positively affect their prices. Second, increased disclosure can reduce information asymmetry between investors. This in turn encourages uninformed investors to buy the stock, also augmenting the stock price. Indeed, Balakrishnan, Billings, Kelly, and Ljungqvist (2013) find that voluntary disclosures increase liquidity and thus firm value. While the consequences of information disclosure have been widely studied, there is relatively little research on its determinants - in particular, how disclosure depends on the incentives of the CEO who undertakes it. 1 Studying this question is difficult because the CEO s incentives to boost the short-term stock price, via increasing disclosure, are likely endogenous. The CEO s stock price concerns may stem from a number of channels, but for each of these channels, there may be reverse causality from disclosure to the incentives, or omitted variables may jointly affect both the CEO s incentives and his disclosure decision. For example, the CEO may care about the current stock price if he intends to issue equity on behalf of the firm (Stein (1996)) or sell his own shares (Stein (1989)). However, the decision to sell primary or secondary equity is endogenous and in particular may be driven by the information environment at the time. For example, it may be that a particular 1 One notable exception is Balakrishnan, Billings, Kelly, and Ljungqvist (2013) who show that an exogenous decrease in public information incentivizes managers to increase disclosure. In this paper, we study how the manager s contract provides him with incentives to release information. 2
month is newsworthy and leads to the CEO undertaking many news releases (even in the absence of strategic considerations), and the CEO takes advantage of the temporary stock price increase by opportunistically selling equity. Thus, disclosure causes equity sales rather than the expectation of equity sales causing disclosure. Alternatively, the CEO s stock price concerns may stem from takeover threat (Stein (1988)), which may cause a CEO to disclose to boost the stock price and alleviate the threat. However, uncertainty about the firm s future prospects (an omitted variable) may jointly cause a firm to be a takeover target (as potential acquirers may have a different view on the firm s long-run value than the market) and to voluntarily disclose information (to reduce the uncertainty). Identification problems are typically addressed by using an exogenous shock to the endogenous variable - for example, unexpected equity sales due to sudden liquidity needs. However, truly exogenous shocks are unpredictable by the CEO, and thus he is unable to manage the information environment in advance by increasing disclosure. Thus, identification in our setting requires a measure of the CEO s stock price concerns that are both predictable and likely to be exogenous - i.e. unaffected by disclosure and unrelated to the current information environment. We use the amount of shares and options that is scheduled to vest in a given month. This amount is driven by the magnitude and vesting period of equity grants made several years prior 2, and thus unlikely to be affected by current disclosures or omitted proxies for the current information environment. We calculate this amount from 2006 to 2011 using a new dataset from Equilar, which takes advantage of increasing disclosure requirements as a result of FAS 123(R), and hand-collect it from proxy statements and SEC Form 4 filings from 1994 to 2005. We first find that CEOs sell significant amounts of equity shortly after it vests, consistent with optimal exercise behavior for a risk-averse agent (e.g., Kahl, Liu, and Longstaff (2003) and Hall and Murphy (2002)). We observe a CEO s first trade in 35% of the vesting months in our sample, and more than 50% within three months of vesting. Thus, scheduled vesting of equity indeed leads the CEO to be concerned with the short-term stock price. 2 The average vesting horizon in our sample is three years, with a maximum of seven years. 3
We next show that during the month in which significant equity is scheduled to vest, firms undertake a significantly greater number of news releases, as recorded in the Capital IQ database. We show that firms release 12.5% more news in vesting months compared to non-vesting months. These results are robust to controls for determinants of a firm s information environment, other components of CEO compensation, as well as firm and year fixed effects. We then classify news items into discretionary and non-discretionary, under the rationale that discretionary disclosures are easier to manage by a manager wishing to boost the stock price in a short period of time. Consistent with this hypothesis, we find that the increase in news items during the vesting month is concentrated in those that are discretionary. We also find that firms significantly reduce the number of corporate news releases both one month before and two months after the vesting month. These additional results suggest that the increase in disclosures in the vesting month is not part of a general trend, but the CEO s strategic decision to delay news releases until the vesting month, and accelerate such releases into the vesting month. Having documented a link between the CEO s stock price concerns and news releases, we next study the effect of news releases on stock returns to verify whether disclosure indeed has the intended effects. Discretionary news released in the vesting month generate a significant cumulative abnormal return of 30 basis points, for stock and options together, during a 15-day window starting from the release date. We derive a simple back-of-envelope calculation for the magnitude of the gain a CEO can extract from undertaking strategic news releases to affect short-term stock returns. In our sample, the average value of a CEO equity transaction is $5.4 million. According to the abnormal return estimations provided above for a 15-day window, the implied gains for an average CEO from the strategic release of discretionary news, amount to $16,200. The implied gain is modest but is in line with gains in cases of illegal insider trading. The above calculations measure the CEO s benefit from increasing disclosure if he has no price impact and so is only concerned with the level of the stock price. However, if the CEO expects to sell a significant amount of equity upon vesting, and thus have price impact, he will also benefit from any increased liquidity that results from higher investor attention or 4
lower information asymmetry. The average amount of vesting equity (stock and options) in a vesting month, as a percent of total shares outstanding, is 2 basis points (with a maximum of 45 basis points). We report an abnormal increase in trading volume in the vesting month. On the first day after a news release, for all equity (stock and options), we find that turnover increases by 0.41% for discretionary news, and 0.71% for non-discretionary news. These values decrease as we extend the number of days in our event-study windows. Therefore, in addition to the price increases, CEOs also benefit from the greater liquidity that results from higher trading volumes surrounding a news release, thus enabling them to trade with a smaller price impact. The final step is to show that CEOs indeed take advantage of the observed short-term run-ups in stock price and liquidity. We compute the length of time between the release of corporate news and the date at which the CEO first sells some of his equity holdings, as reported in the Thomson Financial Insider Trading filings. Focusing on news and transactions that happen within the vesting month, we find that the median CEO takes 3 days to sell some of his equity holdings from the date of the news release. In other words, counting from the last corporate news event recorded on Capital IQ as occurring within a vesting month, half of the CEOs in our sample sell equity within the period of 3 days. Moreover, 28% of the CEOs in our sample cash in their shares and options on the same day of the news event. These results suggest that CEOs can in fact generate trading profits from the short-term return effect associated with corporate news events. Overall, our results indicate that the timing of corporate news may be biased by CEOs seeking to affect their firms stock price to benefit their own trading. Our paper is related to two main literatures: corporate disclosures and equity vesting. Starting with the former, Balakrishnan, Billings, Kelly, and Ljungqvist (2013) show that managers increase disclosure by providing more earnings guidance. They do so in response to a reduction in public information caused by exogenous broker closures or mergers. Ahern and Sosyura (2013) find that bidders in stock mergers originate significantly more positive news stories after the start of merger negotiations, but before the public announcement. They show that such strategy generates a temporary run-up in bidders stock prices during the period when the stock exchange ratio is determined, which can help reduce the cost of the 5
takeover. While the decision to undertake a merger or to use stock financing may be driven by the expectation of imminent positive news releases, we study the incentives to disclose resulting from equity grants made several years prior. We find that firms tend to delay the release of news in the month before the vesting month. This result is consistent with the findings in Chuprinin (2011), which shows that companies tend to ration the delivery of news and create reserves that allow them to create sustainable price trends and to mitigate unexpected shortages of public information. In addition to disclosing information through news releases, firms can do so through advertising. Indeed, Lou (2013) shows that managers increase firm advertising to attract investor attention and increase short-term stock returns. Like in our paper, Lou (2013) connects such activity to insider-trading related benefits. However, advertising expenses are reported only annually, which makes it harder to isolate causal effects of predicted events and advertising activity. However, unlike in Lou (2013) and Ahern and Sosyura (2013), we use equity vesting schedules to predict CEOs trading. Such schedules are determined several years in advance. In addition, our analysis is at a more granular level, studying the number of news releases within a given month. This granularity reduces the likelihood that, several years prior, the board chose equity vesting dates to coincide with the precise month in which it expected the firm to release news. More generally, our paper is related to the literature on media and its impact on stock returns and liquidity. On the return dimension, Fang and Peress (2009) find a significant return premium on stocks with no media coverage, and Huberman and Regev (2001) and Tetlock (2011) show that individual investors (over)react to stale information. On the trading dimension, Engelberg and Parsons (2010) show a causal relation between media and volume, and Brennan and Tamarowski (2000) establish a chain of causation between corporate investor relations activities, the number of stock analysts who follow the firm, and the liquidity of trading in the firm s shares. Grullon, Kanatas, and Weston (2004) show that visibility related to greater advertising expenditures increases ownership breadth and liquidity. We contribute to this literature by analyzing a compensation-related incentive to use media as a vehicle to increase stock returns and liquidity. 6
The second literature to which this paper relates studies the relationship between vesting equity and corporate decisions. While most existing research on CEO contracts study the level of a CEO s incentives, some recent papers investigate the horizon of incentives. Gopalan, Milbourn, Song, and Thakor (2013) are the first to use the Equilar dataset to quantify the duration of a CEO s equity incentives, linking it to firms earnings management. Edmans, Fang, and Lewellen (2013) show that newly-vesting equity is associated with declines in investment in the same year as well as a greater likelihood of the manager meeting or narrowly beating earnings forecasts. Ladika and Sautner (2013) show that FAS 123(R) led to boards accelerating the vesting of previously-granted equity to avoid an accounting charge, which in turn led to a reduction in investment. This paper is organized as follows. In Section 2, we describe the data and the main variables used in our study. Section 3 shows that vesting schedules are highly correlated with actual equity sales. In Section 4, we present the core results of our paper, linking the timing of news releases with equity vesting schedules. In Section 5, we document the short-term stock return effects of corporate news events and their relation with the vesting schedules. Section 6 concludes. 2 Data and Empirical Strategy This section describes the main variables used in our empirical analysis and our empirical strategy. 2.1 Equity Vesting, Insider Trading, and Corporate News Data We obtain data on the vesting schedules of restricted stock and options from the Equilar dataset. Similar to ExecuComp, Equilar collects their compensation data from the firms proxy statements. We obtain details of all stock and option grants to all named executives of firms in the Russell 3000 index for the period between 2006 and 2011. For each grant, we have both the size of the grant, the length of the vesting period, and the nature of the vesting: whether the grant vests equally over the vesting period (graded vesting) or entirely 7
at a specific time (cliff vesting). This data was used in Gopalan, Milbourn, Song, and Thakor (2013), Edmans, Fang, and Lewellen (2013), and Lou (2013), among others. For the period before 2006, we hand-collect vesting details available in Form 4 (insider trading) filings as well as in proxy statements (Cadman, Sunder, and Rusticus (2013)). While proxy statements contain detailed vesting information for option grants, they typically do not provide them for restricted stock grants. Form 4 filings provide vesting details for both option and stock. However, because Form 4 filings are filed by the beneficial owner (the CEO), they are more prone to errors than proxy statements, which are audited and filed by the firm on an annual basis. Therefore, we use the information given in proxy statements for option grants and supplement it with information on stock grants obtained from Form 4 filings. These are available online starting from 1994. Both sources describe vesting conditions in footnotes. To limit the work involved in obtaining and coding the footnotes, we restrict our pre-2006 sample to firms that were part of the S&P 500 within that period. While information on the grant itself is available in a standardized format in proxy statements and Form 4 filings, vesting conditions are typically described in footnotes. We present next the structure of typical footnotes on the proxy statements and Form 4. We selected one for Louis Gerstner of IBM in 2001, with a grant of 650,000 options with an exercise price of $109.62. The footnote on the proxy statement reads as follows: Mr. Gerstner s grant becomes exercisable in two equal installments, on March 1, 2001 and March 1, 2002. We selected a Form 4 filed by John H. Eyler, Jr., of Toys R Us in 2004. On April 1, 2004, Mr. Eyler was awarded 20,000 shares of (restricted) common stock. The footnote on Form 4 reads as follows: These shares vest 50% on the second anniversary of the award date and 100% on the third anniversary of the award date. We use these footnotes to calculate the number of stocks and options due for vesting on each date. In the example for Mr. Gerstner, half of the 650,000 options vests on March 1, 2001, and half on March 1, 2002. In the Equilar database, such an example would have been coded with a vesting period of two years and graded vesting. In the example for Mr. Eyler, half of the 20,000 shares of common stock vests on April 1, 2006, and half on April 1, 2007. 8
The other category in Equilar is cliff vesting, which means that all of the options will vest at the end of the vesting period. Equilar does not capture whether graded vesting is on an annual, quarterly, or monthly basis. Because most graded vesting schedules prior to 2006 are annual, we conduct our base analysis assuming an annual schedule. Our results are robust if we assume a quarterly schedule for all graded vesting. We also assume that graded vesting refers to straight-line vesting. Note that our method of estimating the amount of vesting equity differs slightly from the method in Edmans, Fang, and Lewellen (2013). That paper studies the actual number of shares and options that vest in a given year. For example, they calculate how the number of unvested options with a particular (exercise price, expiration date) combination falls over the course of the year. By looking at actual vesting ex-post (which is known to the CEO ex-ante as he observes his contract), they do not require the assumption that graded vesting refers to straight-line vesting. This measure is only available on an annual basis, consistent with the fact that Edmans, Fang, and Lewellen (2013) study the link between vesting equity and investment (which is also available on an annual basis). In contrast, our dependent variable of interest is the number of news releases in a given month, which requires us to estimate the number of shares and options that vest in a given month. Thus, rather than looking at actual vesting ex-post, we follow Gopalan, Milbourn, Song, and Thakor (2013) by studying predicted vesting ex-ante. Specifically, when new equity is granted, we predict the number of units of this grant that will vest in a given month by using its grant date, vesting period, and cliff- versus graded-vesting status. While this requires the assumption that graded-vesting refers to straight-line vesting, it allows us to estimate vesting equity on a monthly frequency. In addition to vesting equity, we also study the dollar value of the actual equity sold. We obtain this data from the Thomson Financial Insider Trading database, which is compiled from Form 4 filed with the SEC. Finally we obtain information on corporate news from Capital IQ. In particular, we retrieve information on press releases. We then classify all the news into discretionary and non-discretionary. The discretionary category includes items such as: client announcements, product-related announcements, corporate guidance, company conference presenta- 9
tions, buyback update, strategic alliances, follow-on equity offerings, and shareholder/analyst calls, among others. The non-discretionary category of news includes items such as: announcements of earnings, earnings calls, executive/board changes, annual general meeting, executive changes, regulatory agency inquiries, board meeting, and auditor changes, among others. 2.2 Control Variables In addition to the data on corporate news events and on CEO compensation and equity transactions, we use a number of controls intended to capture firms information environment and other CEO incentives. Following Gopalan, Milbourn, Song, and Thakor (2013), we compute the average duration of CEOs non-vested compensation. This measure has been shown to be associated with CEO short-termism and with earnings management. The analysis in our paper focuses however around the vesting month of CEO restricted pay, and duration incentives are less likely to be present during that period. We calculate option delta and vega measures, separately for CEOs vested and unvested options, following the method described in Edmans, Fang, and Lewellen (2013). These measures capture the sensitivity of the price of options to a one dollar change in the price and a one percent change in volatility of the underlying stock, respectively. They capture the degree to which CEOs would be willing to influence the mean level and volatility of the firms stock prices. We also measure the moneyness of vesting options as a weighted average of a dummy variable that equals one for a vesting option that is in the money, weighted by the Black-Scholes value of the option. We control for the total compensation of the CEO, measured as the sum of salary and bonus and the value of the current grants of equity-based compensation. Incentive pay is the value of stock and options as a fraction of total compensation. These data were obtained from ExecuComp. We also control for the age of the CEO, to control for life-cycle driven differences in company policies (e.g., Malmendier and Tate (2005, 2008), Malmendier, Tate, and Yan (2011), Yim (2013)). We complement the compensation data with data on stock characteristics from the Center for Research in Security Prices (CRSP) and financial data from Compustat. In particular, 10
we add to our control variable list some CRSP measures of trading volume, bid-ask spread, and past stock returns. We also compute a measure of stock illiquidity following Amihud (2002), which is simply the number of units of absolute stock return per dollar of trading volume. Regarding company fundamentals, we use the earnings surprise measure (SUE) available in the I/B/E/S database. We also control for R&D and advertising expenses as a percentage of total assets, from Compustat. We control for advertising expenses because it has been shown in Lou (2013) that managers adjust firm advertising to attract investor attention and benefit from temporarily inflated stock prices. We add to our list of control variables a measure of mutual fund flow-induced trading pressure, which serves as a proxy for stock mispricing. We compute this measure following Edmans, Goldstein, and Jiang (2012). It has been shown that, stock overpricing due to excess demand pressure from mutual funds is positively associated with new equity issues (Khan, Kogan, and Serafeim (2012)) and it could also be linked to insider sales. Finally, we use an indicator variable to capture the effect of firms fiscal-year end, which involves a substantial concentration of disclosure and corporate news activity. In addition, Oyer (1998) argued that executive bonus plans are commonly based on fiscal-year results, which can provide incentives for managers to manipulate prices to maximize their own incomes rather than their firms profits. 2.3 Descriptive Statistics In Table 1, we present the summary statistics for the main variables used in our study. Our key dependent variables are corporate news events and insider transactions. A typical firm in our sample has an average (median) of 3.19 (3) press releases, 2.53 (2) website activities, and 1.50 (1) transactions in days with observed corporate events as recorded in the Capital IQ database. Regarding insider transactions, which we obtain from the Thomson Financial Insider Filing database, the average (median) number of shares sold by CEOs in our sample is 61,000 (22,000) per transaction, while the average (median) number of options exercised is 180,000 (83,000). In dollar terms, the average (median) value of shares sold by a CEO is $1.2 million ($0.48 million) and the average (median) value of options exercised by a CEO is $4.2 million ($1.8 million). 11
Our key independent variables are related to the vesting schedules of CEOs restricted compensation. The average (median) stock grant is worth $1.06 million ($0.70 million), and the average (median) option grant is worth $0.45 million ($0.23 million). In our sample, the fraction of option and stock grants that vest entirely at a specific time (cliff vesting) is 37% and 15%, respectively. The remaining grants vest equally over a period of time (graded vesting). The equity vesting periods in our sample are on average 3 years long and can become as long as 7 years (for stock grants). This constitutes one of the most important properties of the equity vesting schedules. In particular, these schedules are set by equity grants awarded to the CEO many years in the past and can plausibly be considered exogenous to the current information environment of the firm. The average pay duration of the CEOs in our sample is 1.43 years, and the average CEO is 55 years old. These statistics are consistent with those in Gopalan, Milbourn, Song, and Thakor (2013). In the Appendix, we provide a description of the main variables used in our study. 3 Insider Transactions and Equity Vesting This section studies whether CEOs indeed sell equity soon after it vests. In Table 2, we compute the average distance between the month in which a CEO s equity vests and the month in which for the first time we observe the same CEO executing a transaction. We provide those statistics separately for restricted stock (Panel A) and stock options (Panel B), and also separately for cliff and graded vesting. Overall, we observe a CEO s first stock trade in 35% of the vesting months in our sample, and more than 50% if we consider not just the vesting month but also the two subsequent months. Similar values are reported for the average time between vesting and the first exercise of a stock option grant by a CEO. These results suggest that managers are likely to sell their stock and exercise their options upon vesting, which is consistent with optimal behavior of a risk-averse agent (e.g. Hall and Murphy (2002), Kahl, Liu, and Longstaff (2003)). Therefore, equity vesting can effectively capture a CEO s concern with short-term stock prices. 12
In Table 3, we provide a multivariate analysis of the determinants of CEO transactions. In particular, we report the results obtained from the following regression specification: 3 T ransaction s,t = α + β V estingmonth s,k,t+τ + γ Controls + Fixed Effects + ɛ s,t (1) τ=0 where the dependent variable T ransaction s,t is an indicator function which equals one if the CEO sells his shares or exercises his options in a particular month (t), and equals zero otherwise. Among the independent variables, we consider an indicator function V estingmonth s,k,t+τ for the vesting month (τ = 0), and additional indicators for each of the three months following the vesting month (τ = 1,τ = 2, and τ = 3). The main control variables we use are described in Section 3.2. In addition to those, we also include indicators for earnings announcement months (yearly and quarterly), indicators for ex-dividend months, as well as for annual general meeting (AGM) months to account for news and press activity unrelated to vesting. Introducing firm and year fixed effects allows us to control for unobserved firm characteristics and time-varying trends. As a result, our measures are strictly time-varying differences within the firm. The results reported in Table 3 corroborate the simple analysis we provided in Table 2. Overall, there is a 19% to 27% higher probability that we observe a transaction by a CEO during the month in which their stock and option holdings are pre-scheduled to vest. However, from the second month after vesting and onwards, the likelihood of observing a CEO transaction decreases significantly. Consistent with the results in Oyer (1998), we show that firms fiscal year ends also strongly predict CEOs transactions. There is a 14% to 20% probability of observing a CEO trade in the month in which there is an announcement of earnings for the prior fiscal year. After controlling for yearly earnings announcements, our indicator for quarterly earnings announcements exhibits a negative and significant coefficient. This is because most of fiscal year earnings announcements coincide with the last quarter earnings announcements. Effectively, the indicator function for the fiscal year earnings announcements is an interaction between yearly and quarterly earnings announcements. 13
Note also that the likelihood of a CEO transaction is larger when the vesting month is also an ex-dividend month or an AGM month. Lastly, not surprisingly, the exercise of options is positively related to their moneyness. 4 News Releases and Equity Vesting Table 4 reports the core results of this paper, that CEOs significantly increase disclosures in months in which they have vesting equity. We run the following regression: 3 NewsEvent s,t = α + β V estingmonth s,k,t+τ + γ Controls + Fixed Effects + ɛ s,t (2) τ= 1 where the dependent variable NewsEvent s,t represents a count of the corporate news events related to a particular firm (s) that were recorded in Capital IQ for a given time period (t). Compared to specification (1), we add to this regression specification an indicator function for the month prior (τ = 1) to the vesting month (t). Note that in Table 4 the regression coefficient associated with the indicator for the month prior to the vesting month is negative and significant for the full sample (in column 1 we show a coefficient of -0.10 with t = 6.01 for all news events and all securities vesting), and also for the different sub-samples (stock and option vesting, and discretionary and non-discretionary news). Note that the results are stronger for the discretionary news (columns 2, 5, and 8). This result suggests that firms are likely to strategically delay the release of corporate news in the month prior to the vesting month, which can then create clustering of news in the vesting month. This also suggests that firms could strategically create reserves of news which they could later use to mitigate potential shortages of public news (Chuprinin (2011)). To our knowledge, these results are the first to link the timing of the release of corporate news and the vesting schedules of CEOs restricted compensation. In the vesting month, we observe 0.05 (t = 3.04) more discretionary news events (column 2), after controlling for other determinants of news releases. Note also that two months after vesting there appears to be a reversal in the intensity of news releases, stronger also for discretionary news (column 1), and across the sub-samples (columns 5 and 8). 14
Note that the indicator functions for earnings announcements absorb a significant portion of the effects related to corporate news releases. We argue that the news items we classified as discretionary are more voluntary, while the items under the non-discretionary category are more likely mandated by market regulations. Therefore, managers are more likely to use discretionary news to affect market perceptions. Our results are consistent with this idea, as they appear to be statistically and economically stronger for discretionary news. In Table 5 we focus our analysis on the amount of equity vesting, instead of simply an indicator for whether a month is a vesting month or not. We use the following regression specification: NewsEvent s,t = α + ρ AmountV esting/so s,k,t + + β V estingmonth s,k,t+τ + τ { 1,1,2,3} + γ Controls + Fixed Effects + ɛ s,t (3) where the variable AmountV esting/so s,k,t is the amount of equity vesting divided by the number of shares outstanding in the vesting month. The other variables are as in specification (2), except that the indicator V estingmonth s,k,t+τ does not include the vesting month (τ = 0). The results we report in Table 5 are very similar to those presented in Table 4. There appears to be evidence of strategic delay of news in the month before vesting, and a positive relation between the amount of equity vesting and the amount of news releases, in particular for discretionary news (columns 2, 5 and 8). In Table 5 we do not observe the reversal of the intensity of news two months after vesting, like in Table 4. In Table 6 we report the breakdown of the news events by type. These events are extracted from Capital IQ. In particular, they are extracted from press releases in the Capital IQ database. We present the top 30 events, which account for 91.44% of our sample. Note, for instance, that earnings calls account for 9.10% of the news observations in our sample. The most common news event in our sample related to client announcements (13.14% of all events). We also present the breakdown of the events observed during the vesting months. Note that the most frequent news event observed in the vesting months is earnings calls, representing 12.77% of all events observed in the vesting months. The second most likely events 15
in the vesting months are product-related announcements (11.96%) followed immediately by client announcements (11.38%). 5 Returns and Liquidity in the Vesting Month The results we report in Tables 4 and 5 are consistent with the idea that firms have an incentive to synchronize the release of corporate news with the vesting schedules of CEOs restricted equity. We argue that such timing strategy can help firms attract investors attention or reduce information asymmetry among investors during the equity vesting month from which CEOs can benefit by trading in their own account. We argue that firms have a preference to cluster in the vesting month the release of news that are discretionary. Such category of news may carry less fundamental content. This could in turn lead investors with limited attention and limited processing capacity to take such abnormal increase in corporate news at face value and become net buyers of the firm s stock, overreacting and creating short-lived run-ups in its price (Barber and Odean (2008)). Such short-term run-ups in firms stock price could then be taken advantage of by CEOs who would opportunistically sell their equity in the firm to explore the stock mispricing. In Table 7, we study whether the strategy used by firms to cluster the release of corporate news in the equity vesting months does indeed generate the intended stock price reactions. We conduct an event study of the impact of the release of corporate news in the vesting month. We report averages of the cumulative abnormal return (CAR), abnormal bid-ask spread, and abnormal trading volume (normalized by the amount of shares outstanding in the vesting month) of the firms stock, for the release of both discretionary and nondiscretionary news. We create three time windows that cover one, fifteen, and thirty days after the news release date within a given vesting month. The results in Table 7 show that discretionary news released in the vesting month generate a cumulative abnormal return of 30 basis points (t = 5.20) within 15 days from the release date. Using this figure, we can perform a back-of-envelope calculation of the implied gains that a CEO can extract from strategically releasing news according to his equity vesting schedules. As discussed in section 2.3., the average value of a CEO transaction is $5.4 million (stock and options together). 16
Therefore, 30 basis points of cumulative abnormal return associated with the release of discretionary news in the vesting month implies an expected average gain of $16,200 within 15 days of the news release date. This appears to be a modest gain, but it is in line with gains in cases of illegal insider trading. Discretionary news released in the vesting month generate a cumulative abnormal return of 37 basis points (t = 4.76) for restricted stock, and 36 basis points (t = 5.35) for stock options, during a 15-day window starting from the release date. This return effect does not appear to vanish after we extend the event window to 30 days from the news release date. Note that the return effects can be stronger for non-discretionary news. For example, a cumulative abnormal returns of 53 basis points (t = 3.89) is generated over 15 days for stock options. In Figure 1, we present two event-study plots that document the cumulative abnormal returns (in basis points) that can be generated around the news event dates in the vesting month, when considering all the types of news (Panel A), and when considering only one type of discretionary news: corporate guidance (Panel B). We report separately the effects associated with corporate guidance as this was the type of voluntary discloses that Balakrishnan, Billings, Kelly, and Ljungqvist (2013) focus on. Note that in both Panels A and B the plots exhibit a significant run-up on the news event date. The run-up appears stronger for corporate guidance (Panel B), but the reversal is stronger when considering all the news events (Panel A). However, the stock return figures presented above do not fully account for the benefits CEOs can extract from influencing market perceptions regarding their firms stock. In particular, they do not account for the adverse price impact that CEOs can prevent with the additional trading volume that can be generated by the strategic release of corporate news, as well as its effect on the stock s bid-ask price spread. In Table 7, we also report a positive and significant abnormal trading volume associated with both discretionary and non-discretionary news releases. We define abnormal turnover as the ratio of trading volume to the amount of shares outstanding, adjusted by the average turnover of the 40 days prior to the news event date. Note that, as we gradually extend the news event window from 1 to 30 days starting from the event date, we observe a progressive 17
decline in abnormal turnover values and also their statistical significance, from 41 basis points (t = 37.05) to 6 basis point (t = 17.45) for discretionary news and vesting of all equity. Such pattern remains after we split the sample into stock vesting and option vesting, and also for non-discretionary news. In Figure 2 we plot the ratio of the abnormal volume to shares outstanding from 10 days before the news event date until 30 days after the news event date. Note that, when considering all the types of news events (Panel A), the abnormal turnover of the firm rises to about 41 basis points on the event date, while for corporate guidance (Panel B) it rises to about 140 basis points on the event date. These results suggest that CEOs can also benefit from the increased turnover of their firms stock upon vesting of their equity grants. In particular, the abnormal trading volume generated by the release of corporate news can help absorb the potentially adverse price impact of CEOs trades. Lastly, in Table 7, we report the effects of news releases on the abnormal bid-ask price spread. It appears that the tendency is for the spread to widen immediately after earnings related news releases, which corrects immediately after. Like in the measurement of stock turnover, the abnormal bid-ask spread is calculated in excess of the average bid-ask spread for the 40 days prior to the news event date. Are CEOs really taking advantage of the observed short-term run-ups in stock price and liquidity? In order to answer this question, we compute the distance between the date of the release of corporate news and the date of the actual equity transactions that CEOs are required to report with the SEC and which can be obtained from Thomson Financial Insider Filing database. In Table 8, we report only the cases in which both the news event and the transaction occur with the vesting month. The median CEO takes 3 days to sell some of his vested equity holdings, counting from the last observed news event in the Capital IQ database. In other words, counting from the last corporate news event recorded on Capital IQ during the vesting month, half of the CEOs in our sample trade equity in the period of 3 days. Moreover, 28% of the CEOs in our sample cash in their shares and options on the same date as the news event date. These 18
results suggest that CEOs can in fact generate trading profits from the short-term return and liquidity effects associated with corporate news events. Overall, our results indicate that the timing of corporate news may be biased by CEOs seeking to attract investor attention or reduce information asymmetry among their investors to affect their firms stock price to benefit their own trading. Such strategy can accomplish two related goals: it allows the CEOs to cash in their restricted pay at higher prices and at reduced price impact. 6 Conclusion This paper contributes to the literature on managers incentives to manipulate short-term stock prices for their own benefit. We provide evidence that managers synchronize the release of corporate news with the vesting schedules of their equity grants. In addition, they strategically delay the release of news in the month prior to the vesting month, in particular discretionary news. We show that such strategy can effectively increase the short-term price and liquidity of the firm s stock, which the CEO can then exploit profitably. Consistent with the hypothesis that managers actively manage investor attention according to their equity vesting schedules, we show that the intensity of corporate news releases reverts back to its normal level two months after vesting, and the stock price exhibits a significant correction within one month after the run-up created by the abnormal level of news released in the vesting month. We then examine whether managers do exploit the temporary return effect of their opportunistic news release policy. From the date of the last observed corporate news release, half of the managers in our sample exercise options and sell shares within three days. Therefore, they should be able to catch the price and liquidity run-ups before their experience a correction. Our results have implications for the literature about media effects on financial markets and the incentives of executive compensation. First, we use an ex-ante measure of insider trading to show that executives are able to manipulate investor attention deliberately for their own benefit. Second, because the trigger is determined ex-ante, we are able to pin 19
down the effect of manipulated news releases on liquidity and stock returns. This means that investors have limited ability to disentangle manipulated from real news. Third, we show that restricted compensation has a real effect on executives behavior - albeit not necessarily the intended. Such forms of compensation have become commonplace in the recent years (Bettis, Bizjak, Coles, and Kalpathy (2010)). 20
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Appendix: Variable Definitions Variable Accruals Age AGM Month Advertisement Expense / Total Assets Cliff Duration Earn Ann Month Quarterly Earn Ann Month Yearly Earnings Earnings Surprise Ex-Dividend Month Graded Variable Definition Definitions is the amount of discretionary accruals reported by the firm. is the logarithm of the CEO age. is an indicator function that equals one if a particular month coincides with the firm s annual general meeting, and equals zero otherwise. is the ratio of the advertising expenditures (data45 in Compustat) of the current year and the total assets of the previous year (data6 in Compustat). denotes a sample split that focuses on CEO equity grants that vest entirely at a specific time. is the measure of pay duration proposed in Gopalan, Milbourn, Song, and Thakor (2013), and it is calculated as the sum of the product of the vesting periods of all the components of the CEO compensation (including restricted stock, stock options, salary, and bonus) and the present value of all those components, divided by the sum of the present values of all such components. is an indicator function that equals one if a particular month coincides with the firm s announcement of quarterly earnings, and equals zero otherwise. is an indicator function that equals one if a particular month coincides with the firm s fiscal year end, and equals zero otherwise. denotes a sample split that focuses on corporate news events that are related to earnings. is the earnings surprise measure (SUE) from the I/B/E/S database. is an indicator function that equals one if a particular month coincides with the ex-dividend month, and equals zero otherwise. denotes a sample split that isolates CEO equity grants that vest gradually over a period of time. Incentive Pay is the fraction of the total compensation of the CEO excluding salary and bonus, and it is calculated as (Tdc2-Salary-Bonus)/Tdc2 using the variables from ExecuComp. Moneyness is the fraction of vesting options that is in-the-money.