Strategic News Releases in Equity Vesting Months
- Edmans, Pinto, Wang and Xu
- A version of the paper can be found here.
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We show that CEOs strategically time corporate news releases to coincide with months in which their equity vests. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news. These news releases lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, potentially resulting from increased investor attention or reduced information asymmetry. The CEO takes advantage of these effects by cashing out shortly after the news releases.
Information impacts asset prices. CEOs have discretion to manage the timing of information to the marketplace. A natural hypothesis is that CEOs might use this discretion to release information for their own personal benefit.
To test this hypothesis, the authors investigates whether CEOs strategically change the timing of news release for personal gains. To be specific, the paper hypothesizes that a CEO will delay or accelerate news releases into the months in which their equity vests. For those who are unfamiliar with “vesting,” one can think of vesting as the trigger that allows the CEO to actually access the value of their shares. Once the CEO vests their equity, they can sell the shares.
First, the paper hand-collects vesting data from 2006 to 2011 and performs a statistical analysis to test whether news releases are strategically coordinated with vesting periods. All else equal, a CEO might want to time good news at the same time their equity vests, so they can maximize the price at which they sell their equity in the marketplace.
- The table below shows that firms release 4% more discretionary news in vesting months (divide the coefficient of 0.0615 by the average number of discretionary news releases of 1.48 per month to get 4%).
- Discretionary disclosures are significantly higher in “vesting months” and significantly lower in the months before and after “vesting months”.
The paper also studies the effects of news releases on trading volume and stock returns.
- In the table below, the disclosure of one discretionary news item in a “vesting month” generates a significant 16-day abnormal return of 28 bps (which equates to an average gain of $14,504).
- The graph below vividly shows the transient increase in trading volumes after a news release. To be specific, on the first day after a discretionary news release, abnormal trading volume rises by 0.32%, compared to the mean of 0.22%.
The final step is to demonstrate that CEOs take advantage of the transient boosts in stock prices and trading volume.
- The charts below illustrate that 50% of CEOs engage in their first equity sale within 5 to 6 days of the last discretionary news release. CEOs seem to be selling into the news release.
The evidence seems to suggest that CEOs exploit their ability to “time news releases” such that they maximize the value on their vested shares.