Question: On October 25, 2002, The Globe and Mail (p. B2) reported Former Big Bear head denies manipulation. The article described accusations against the former CEO

On October 25, 2002, The Globe and Mail (p. B2) reported “Former Big Bear head denies manipulation.” The article described 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. Assuming that the Big Bear CEO’s compensation contract included regular grants of ESOs, are these accusations consistent with the findings of Aboody and Kasznik (2000)? Explain why or why not.
b. If, as a result of a rebound at Blue Range, Big Bear’s CEO’s options became deep in the money, what is the likely effect on the CEOs exercise decision?

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