Do corporate managers manipulate the stock price to have a lower exercise price for their stock options?: Some evidence from the U.S. stock market

We investigate a unique period of at least six months and one day, at the beginning of which a group of American companies cancel their employee stock options that are voluntarily tendered in return for replacement options to be granted at the end of the period (the stock option exchange program). As the exercise price of the replacement options is determined by the stock price on the re-grant date, a decrease in the stock price during the period benefits participating employees. We examine the hypothesis that management, when its options are tendered in exchange for replacement options, manipulates the stock price during the period to have a lower exercise price for the replacement options. We find some evidence supportive of this hypothesis. Furthermore, participation of management in the exchange program appears to be costly to shareholders who have to sell before the end of the period.