Voluntary Disclosures and the Exercise of CEO Stock Options
62 Pages Posted: 25 Mar 2008 Last revised: 20 Jun 2009
Date Written: July 9, 2008
We examine voluntary disclosures around the exercise of CEO stock options. Previous research shows that managerial incentives depend on the intended disposition of the underlying shares of exercised stock options. When CEOs intend to sell the underlying shares of exercised options, they have an incentive to increase stock prices in the pre-exercise period. In contrast, when CEOs intend to hold the underlying shares, they have a tax incentive to decrease stock prices in the pre-exercise period. Consistent with these private incentives, we find a significant increase in the frequency and magnitude of good (bad) news announcements in the pre-exercise period when CEOs implement exercise-and-sell (exercise-and-hold) strategies. We further show that CEOsý propensities for opportunistic disclosures are positively related to the value of their exercised stock options. Lastly, we find that the Sarbanes-Oxley Act (SOX) generally reduces, but does not eliminate, this type of managerial opportunism. In one case (i.e., CEOs selling exercised shares back to the company), however, SOX might have inadvertently encouraged the use of opportunistic disclosures.
Keywords: Voluntary Disclosures, Management Forecasts, Executive Stock Options
JEL Classification: G30, M43
Suggested Citation: Suggested Citation