Decomposing Executive Stock Option Exercises: Relative Information and Incentives to Manage Earnings

Journal of Business Finance & Accounting, Vol. 38, Nos. 5‐6, pp. 536-573, 2011

62 Pages Posted: 12 Dec 2010 Last revised: 25 Jul 2011

See all articles by David Veenman

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Bart van Praag

University of Amsterdam - Business School

Wei Zhang

SUNY at Albany

Multiple version iconThere are 2 versions of this paper

Date Written: May 2010

Abstract

This paper examines the information content of stock option exercises versus regular insider share trades by corporate executives. We argue that the asymmetric payoff structure of options makes managerial wealth – compared to holdings of shares – relatively more sensitive to stock price changes and more likely induces opportunistic behaviour. Consistent with our predictions, we find option exercises followed by share liquidations are associated with disappointing future earnings news, while sales of previously held shares are not. In addition, liquidation exercises of deep in-the-money options are associated with larger income-increasing abnormal accruals, signalling lower quality earnings. On the buy side, we find that regular insider share purchases are associated with positive future earnings news while purchases through option conversions are not. This research has implications for investors, compensation committees, and future research on corporate insider trades.

Keywords: insider trading, earnings management, stock options, executive compensation

JEL Classification: D82, G14, J33, M41

Suggested Citation

Veenman, David and Hodgson, Allan C. and van Praag, Bart J. and Zhang, Wei, Decomposing Executive Stock Option Exercises: Relative Information and Incentives to Manage Earnings (May 2010). Journal of Business Finance & Accounting, Vol. 38, Nos. 5‐6, pp. 536-573, 2011, Available at SSRN: https://ssrn.com/abstract=1723340

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Bart J. Van Praag

University of Amsterdam - Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Wei Zhang

SUNY at Albany ( email )

School of Business
Department of Accounting and Law
Albany, NY 12222
United States

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