Ivo Jansen, an assistant professor of accounting at the Rutgers School of Business–Camden, has found that investors can make money by forecasting the date a company CEO is awarded stock options.
Jansen says research has shown that managers are able to manipulate the predetermined price at which they can buy stock in their company.
“If the predetermined price, which is also called the exercise price, is low the option has more value to the executives because they want to buy low and sell high,” Jansen says. “Can we exploit their self-enrichment to make money ourselves? We find you can.”
Jansen co-authored the research paper with Lee Sanning, a business professor at the University of Wyoming. The paper will be published this fall in the Financial Analysts Journal and the business scholars’ findings were featured in the Wall Street Journal in May.
Stock options are often granted to executives as part of their annual compensation. That option gives them the right to buy the stock at a predetermined price.
“For a lot of executives, it’s a significant part of their compensation,” Jansen says. “Prior research has shown that at least some managers manipulate their firm’s stock price in anticipation of these grants.”
The Rutgers–Camden scholar says while the date that companies award stock options varies, a significant number of firms do it at approximately the same time each year.
“We looked at those firms to see if we could piggyback on the manipulation we expect to take place,” Jansen says. “If we think they’ll award options on April 1, and the manager pushes the stock price down before April 1, maybe we can make money by selling, or shorting the stock.
“Then, we would buy stock on April 1 to take advantage of any bouncing back in the stock price. We find that you can make money by doing that,” he says.
Despite his findings, Jansen says many investors aren’t likely to pursue the strategy due to transaction costs.
“Some large institutional investors who have low transaction costs might be more inclined to do it,” he says.
Jansen says his research has a lot of general appeal because corporate abuses have received a lot of attention over the last few years.
“This is just another example of how top-level executives are able to enrich themselves,” he says. “By trying to exploit it, you eventually take away their opportunity to do it. That would be a social good if executives stop manipulating the stock price.”
Jansen received his undergraduate degree in the Netherlands. He earned his master’s degree from Loyola University of Chicago and his doctorate in accounting from Indiana University.
He teaches Introductory Financial Accounting, Introductory Managerial Accounting, and Intermediate Accounting at the Camden Campus of Rutgers, The State University of New Jersey.
Media Contact: Ed Moorhouse
856-225-6759
E-mail: ejmoor@camden.rutgers.edu