Research Shows Investors Could Profit from Executive Stock Options- Rutger's Today, 2010 June 10

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CAMDEN — A new research paper
could serve as a cheat sheet to savvy investors looking to capitalize on
executive stock options.

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.