Accrual Management and the Decision to Sell or Hold Shares Acquired From the Exercise of Employee Stock Options

Abstract

This study extends the employee stock option literature by examining how the timing of sales of shares acquired at exercise varies with accrual management both before and after the exercise date. We find evidence that accrual management prior to exercise is positively associated with the decision to quickly sell shares after exercise, increasing the profitability of a short-term exercise-and-sell strategy. Alternatively, we find that post-exercise accrual management is associated with executives choosing to delay selling shares, consistent with minimizing personal income taxes. Specifically, our results suggest that executives are more likely to sell immediately after satisfying the minimum (twelve month) holding period for long-term capital gain treatment when they have more income-increasing accruals during the holding period. These results expand on prior research that focused on earnings management leading up to option exercise.

Keywords: stock options, executive compensation, accrual management

JEL Classification: H24, J33, M12, M21, M52