What Does an Executive Stock Sale Tell the Market? Evidence from Sale Transactions Following Stock Option Exercises

42 Pages Posted: 8 Nov 2019

See all articles by George Ryan Huston

George Ryan Huston

Arizona State University (ASU) - School of Accountancy

Janet McDonald Huston

University of South Florida

Mark J. Mellon

Northern Illinois University - Department of Accountancy

Thomas Joseph Smith

University of South Florida

Date Written: October 10, 2019

Abstract

We examine the impact of liquidity and diversification, taxes, and loss aversion on the informativeness of insider sales following stock option exercise. We do not find evidence of liquidity and diversification influencing post exercise sale decisions, suggesting that option related sales are less impacted by these forces than previously thought. We further find evidence that sales more likely to be influenced by taxes are associated with less negative post sale returns. This finding extends prior tax research by showing evidence that insiders are selling soon after the tax advantaged holding period is achieved, and also that these sales are less informative about future returns. Finally, we provide a more distinct contribution to the literature in our examination of loss aversion. Specifically, we provide evidence that the exercise price is the most likely reference point for establishing the gain and loss domain for the insider. We further show that as the price approaches this reference point, sales become less informative and insiders are less willing to continue holding. We also examine short window market reactions to sales among each of these dimensions, finding that the market generally interprets the impact of each of these factors in a manner that is consistent with the post-sale returns.

Keywords: stock options, private information, liquidity and diversification, taxes, loss aversion

JEL Classification: H24, J33, M12, M21

Suggested Citation

Huston, George Ryan and Huston, Janet McDonald and Mellon, Mark J. and Smith, Thomas Joseph, What Does an Executive Stock Sale Tell the Market? Evidence from Sale Transactions Following Stock Option Exercises (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3477563 or http://dx.doi.org/10.2139/ssrn.3477563

George Ryan Huston

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

Tempe, AZ 85287
United States

Janet McDonald Huston

University of South Florida ( email )

Tampa, FL 33620
United States
813-974-6744 (Phone)

Mark J. Mellon

Northern Illinois University - Department of Accountancy ( email )

College of Business
DeKalb, IL 60115
United States

Thomas Joseph Smith (Contact Author)

University of South Florida ( email )

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

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