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

44 Pages Posted: 16 Mar 2013 Last revised: 31 Oct 2019

See all articles by Thomas Joseph Smith

Thomas Joseph Smith

University of South Florida

George Ryan Huston

Arizona State University (ASU) - School of Accountancy

Richard M. Morton

Florida State University - Department of Accounting

Date Written: October 13, 2019

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

Suggested Citation

Smith, Thomas Joseph and Huston, George Ryan and Morton, Richard M., Accrual Management and the Decision to Sell or Hold Shares Acquired From the Exercise of Employee Stock Options (October 13, 2019). Available at SSRN: https://ssrn.com/abstract=2233369 or http://dx.doi.org/10.2139/ssrn.2233369

Thomas Joseph Smith (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

George Ryan Huston

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Richard M. Morton

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

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