Geography and CEO luck: where do CEOs tend to be lucky?

Abstract

CEOs are ‘lucky’ when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing (Bebchuk et al., 2010). We extend Bebchuk et al. (2010) by investigating the geographic peer effects of CEO luck. Our evidence shows that a CEO is significantly more likely to be lucky when other CEOs in the surrounding area are not lucky. It appears that a CEO tends to practice opportunistic timing of option grants when such a practice is less prevalent and thus less noticeable in the nearby area, probably in order to avoid detection. We estimate that the marginal geographic effect on a given CEO’s luck is 18.36%, which is both statistically and economically significant. Our results suggest that regulators should look for corporate opportunistic behaviour where it is not expected.

Keywords:

• option backdating
• CEO luck
• lucky CEOs
• geography
• peer effects
• opportunistic timing

JEL Classification:

• G30
• G34

Notes

¹  For instance, they may attend the same CEO clubs or meetings or they may belong to the same regional business leadership associations, such as local charitable organizations and chambers of commerce.

²  Wang and Pirinsky (2010) offer a thorough review of the literature on the impact of geography on corporate outcomes.

³  The impact of geographic location on corporate policies has been documented in a large number of recent studies. For instance, the effect of geographic proximity has been found on management compensation (Kedia and Rajgopal, 2009), on dividend policy (Becker et al., 2009), on acquisitions (Uysal et al., 2008), on stock returns (Pirinsky and Wang, 2006) and on stock liquidity (Loughran and Schulz, 2005), etc.

⁴  For robustness, we change the minimum number of firms in each zip code to 10 and 20 and still obtain consistent results.

⁵  The marginal geographic effect is estimated as the slope of the logistic regression line when all independent variables are held at their means.