Voluntary Disclosures and the Exercise of CEO Stock Options

62 Pages Posted: 25 Mar 2008 Last revised: 20 Jun 2009

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Andy Puckett

University of Tennessee, Knoxville

Date Written: July 9, 2008

Abstract

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

Brockman, Paul and Martin, Xiumin and Puckett, Andy, Voluntary Disclosures and the Exercise of CEO Stock Options (July 9, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108119 or http://dx.doi.org/10.2139/ssrn.1108119

Paul Brockman (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Andy Puckett

University of Tennessee, Knoxville ( email )

437 Stokely Managment Center
Knoxville, TN 37996
United States

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