Executive Stock Option Exercises and Inside Information

Abstract

This paper examines whether corporate insiders use private information to time the exercises of their executive stock options. Prior to May 1991, insiders had to hold the stock they acquired through option exercise for six months. We¯nd that exercises from this regulatory regime precede signi¯cantly positive abnormal stock returns. This suggests that insiders timed exercises so that the subsequent forced investment in the stock coincided with favorable price performance. By contrast, we¯nd little evidence of the use of inside information to time exercises since the removal of the holding restriction in May 1991. When insiders can sell the acquired shares immediately, the use of private information should manifest itself as negative abnormal stock price performance following option exercise. However, only in the subsample of exercises by top managers at small¯rms, a tiny fraction of the full sample, do we¯nd signi¯cantly negative post-exercise stock price performance after May 1991. We conclude that, in most cases, insiders' potential information advantage in timing exercises is not an important issue in valuing executive stock options.

Private Information, Earnings Manipulations, and Executive Stock-Option Exercises

“…Stock returns are measured as annual raw buy-and-hold returns created from monthly 7 For a detailed discussion of this point see Carpenter and Remmers (2001). 8 Alternatively, we measure the size of executive stock option exercise as either the dollar value of stock option exercise on exercise date, summed across the top 5 compensated executives or the ratio of total number of shares acquired through exercises summed across the top 5 compensated executives to the number of shares outstanding.…”

“…Recall that we made this choice in an effort to increase power in light of Carpenter and Remmers' (2001) failure to find evidence that the timing of executive option exercises predict stock return future performance. We thus repeat the tests in Panel A using Carpenter andRemmers' sample period (i.e., 1992-1995), and sample selection criteria (i.e., including all option exercises available from EXECUCOMP). The results, displayed in Panel E, indicate that using their sample selection criteria and period leads to results similar to theirs.…”

Private Information, Earnings Manipulations, and Executive Stock Option Exercises

“…This research also yields mixed results. Carpenter and Remmers (2001) investigate whether corporate insiders use private information to time the exercises of their executive stock options. Their sample covers two periods, 1984-1990 and 1992-1995, and includes all reported insider exercises in these periods.…”

“…Specifically, stock price changes are abnormally positive in the pre-exercise period and abnormally negative in the post-exercise period. In addition, we repeat these tests using Carpenter and Remmers' (2001) sample period (i.e. 1992-1995 and sample selection criteria (i.e., including all exercises available from EXECUCOMP).…”

Stocking Up: Executive Optimism and Share Retention

“…This paper builds on two branches of recent financial research: executive stock option exercise policy and the impact of managerial biases on corporate decisions. The models of Carpenter (1998) and Hall and Murphy (2002) fix the outside wealth portfolio exogenously when solving for the optimal exercise policy. The setting used in Carpenter, Stanton and Wallace (2008) implies that it is not optimal to hold stock in the outside portfolio.…”