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Executive Stock Option Exercises and Inside Information
Open accessAbstract
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 find that exercises from this regulatory regime precede significantly positive abnormal stock returns. This suggests that insiders timed exercises so that the subsequent forced investment in the stock coincidedwith favorable price performance. By contrast, we find 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 firms, a tiny fraction of the full sample, do we find significantly 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.
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Cites
On Persistence in Mutual Fund Performance
Carhart, M. M. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb03808.x · Cited by 17,283
Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
JEGADEESH, N., & TITMAN, S. (1993) · The Journal of Finance · doi:10.1111/j.1540-6261.1993.tb04702.x · Cited by 11,584
Improved Methods for Tests of Long‐Run Abnormal Stock Returns
Lyon, J. D., Barber, B. M., & Tsai, C. (1999) · The Journal of Finance · doi:10.1111/0022-1082.00101 · Cited by 1,828
Cited by
Are Overconfident CEOs Better Innovators?
HIRSHLEIFER, D., LOW, A., & TEOH, S. H. (2012) · The Journal of Finance · doi:10.1111/j.1540-6261.2012.01753.x · Cited by 1,765
Are executive stock options associated with future earnings?
Hanlon, M., Rajgopal, S., & Shevlin, T. (2003) · Journal of Accounting and Economics · doi:10.1016/j.jacceco.2003.10.008 · Cited by 474
Does backdating explain the stock price pattern around executive stock option grants?
Heron, R. A., & Lie, E. (2007) · Journal of Financial Economics · doi:10.1016/j.jfineco.2005.12.003 · Cited by 441
Metadata
- Authors
- Carpenter, J. N., & Remmers, B.
- Venue
- The Journal of Business
- Publisher
- University of Chicago Press
- Published
- 2001-10
- Volume
- 74
- Issue
- 4
- Pages
- 513-534
- ISSN
- 0021-9398 (ISSN-L)
- 1537-5374
- OpenAlex
- W1585122502
- Cited by
- 181
- References
- 3
- FWCI
- 15.85
- Type
- journal article
- Language
- en
- Open access
- green
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.