On October 25, 2002, The Globe and Mail (p. B2) reported “Former Big Bear head denies manipulation.” The article describes accusations against the former CEO of Big Bear Exploration Ltd. in a hearing before the Alberta Securities Commission. The accusations are that the former CEO fed the market gloomy news about Blue Range Resources Corp., a newly acquired subsidiary of Big Bear, in order to drive down Big Bear's stock price and benefit personally from a subsequent rebound in stock price when Blue Range sprang back from some financial difficulties that were revealed shortly after it was acquired by Big Bear.

Big Bear's former CEO strenuously denied these charges, which had not been proven at the time of the article.

Required

a. Are these accusations consistent with the findings of Aboody and Kasznik (2000)?

Explain why or why not.

b. If the accusations are proven, with which version of PAT (efficient contracting or opportunistic)

is this episode most consistent? Explain.

c. If, as a result of a rebound at Blue Range, Big Bear’s CEO's options became deep-inthe-

money, would the Black/Scholes option value formula have reliably measured their fair value at grant date? Explain why or why not.