The Returns to Spring-Loading

Abstract

Abnormal returns following public disclosures of unscheduled grants to CEOs are positive and highly significant in the post Sarbanes Oxley period. This implies widespread spring-loading (awarding options ahead of good news releases). Between September 2002 and March 2006, a trading strategy that buys stocks after news of unscheduled option grants to CEOs become public earns 1.1% monthly abnormal returns, implying the market did not realize that grants were spring-loaded. After March 2006, when it was no longer possible to spring-load grants in a clandestine fashion, this practice stopped. This suggests spring-loading was a means of providing secret compensation rather than prudent pay practice.

Keywords: Executive stock options, Executive compensation, Corporate Governance, Sarbanes Oxley Act, Backdating

JEL Classification: J33, M52, G34, G38, K42