Private Information and the Granting of Stock Options

We examine the relation between firms’ grants of executive stock options and the presence of positive private information about the firm. Firms privately receive notices of forthcoming patents and have a period of time before that information is made public. We examine whether firms’ option-granting behavior during this period of time, relative to a benchmark period, is consistent with CEOs receiving more option grants based on that private information. Our tests suggest that firms use that information to provide more valuable option grants to CEOs and, further, that firms’ option-granting behavior during the private-information period is related to their reliance on innovation and the value of the patent received. We also find that the increase in option granting is concentrated in periods when the US Patent and Technology Office does not publish information about patent applications prior to issuing patents. Overall, we provide support for our expectation that firms with private information about a forthcoming patent use that information to provide more valuable option grants to their CEO.