The Impact of the Announcement of CEO Options : Empirical Evidence from Australia

This paper examines the price reaction around the announcements of CEO option grants in Australia. Our aim is to explore if there is a price reaction and if so, is the reaction consistent with the argument that options grants align the interests of managers and shareholders and motivate managers to perform. The sample of announcing firms is partitioned according the whether the firm is granting only options or granting option grants concurrently with announcing an increase in CEOs' fess. Further, the sub-sample of firms announcing only option grants is partitioned into firms announcing in-the-money and out-of-the money option grants. We find a significant positive price reaction around the announcement of out-of-the money CEO option grants and an insignificant price reaction around the announcement of in-the-money CEO option grants. Firms announcing fee increases concurrently with CEO option grants exhibit negative price reactions. The positive/zero/negative price reaction to announcements of out-of-the money options/in-the-money options/options with increase in their salaries suggests that investors have confidence that well structured option grants will enhance CEO performance, and provides support for the agency theory explanation