EXERCISE 6–1 Some research shows that the price of stock is likely to fall in the days leading up to the fixing of the exercise price for employee stock options. It is suggested that the price decreases are the result of selective news releases from managers. Specifically, managers are asserted to delay the release of good news until after the ESO grant date and, instead, selectively release bad news before the date that the stock option exercise price is fixed.

Required:

a. Why do you believe managers are willing to announce bad news but not good news in advance of the stock option grant date?

b. How might you adjust your reaction to news announcements (or lack thereof) around the date when employee stock option exercise prices are set?