Yesterday Merrill Lynch research analysts issued a report detailing their own investigation of the phenomenon. Entitled 'Options Pricing: Hindsight is 20/20', the Merrill report covers the semiconductor and semiconductor equipment companies that comprise the Philadelphia Semiconductor Index [SOX].
Jeff Matthews was quite impressed with the report:
It’s not often Wall Street Research breaks new ground or gets a leg up on investigative reporters, but hitting my email this morning is a Merrill Lynch report that appears to do just that.
According to the Merrill analysts, their 25-page report attempts to identify:
the extent to which stock price performance subsequent to options pricing events diverges from stock price performance over a longer period of time. That’s the easiest and simplest way to measure how aggressive the timing of options grants has been. Theoretically, companies should not be generating any systematic excess return in comparison to other investors as a result of how options pricing events are timed.
Their conclusions on the six worst offenders, according to that methodology: KLA Tencor (KLAC), Marvell (MRVL), Novellus (NVLS), Linear Technology (LLTC), Broadcom (BRCM), and Maxim Integrated Products (MXIM).
The analysts verified their methodology:
Just for curiosity’s sake we ran our analysis on Vitesse Semiconductor as well – Vitesse is already the subject of an SEC investigation related in part to the timing of options grants. The results place VTSS right at the top of the table, which tells us that we’re capturing something meaningful with our analysis. We think that investors need to be aware of the possibility of regulatory activity at other companies that turn up high on our ranking.
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Here's the questionable options timing for Marvell (MRVL), which was high on Merrill's list (click to enlarge):