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The Manipulation of Executive Stock Option Exercise Strategies: Information Timing and Backdating

55 Pages Posted: 12 Jun 2009 Last revised: 14 Aug 2009

David C. Cicero

Harbert College of Business, Auburn University

Date Written: May 1, 2009

Abstract

I identify three option exercise strategies executives engage in, including (i) exercising with cash and immediately selling the shares, (ii) exercising with cash and holding the shares, and (iii) delivering some shares to the company to cover the exercise costs and holding the remaining shares. Stock price patterns suggest executives manipulate option exercises. They use private information to increase the profitability of all three strategies, and likely backdated some exercise dates in the pre-Sarbanes-Oxley period to enhance the profitability of the latter two strategies, where the executive’s company is the only counterparty. Backdating is associated with reporting of internal control weaknesses.

Keywords: executive compensation, options, backdating, corporate governance, internal controls, option exercise, insider trading, informed trading

JEL Classification: G32, G38, J33, J44, K22

Suggested Citation

Cicero, David C., The Manipulation of Executive Stock Option Exercise Strategies: Information Timing and Backdating (May 1, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1416906

David Cicero (Contact Author)

Harbert College of Business, Auburn University ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

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