Get access

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



    Search for more papers by this author
    • Cicero is with the University of Delaware. An earlier version of this paper, written while I was at the Securities and Exchange Commission, was circulated under the title “Strategic Timing and Backdating of Executive Stock Option Exercises: Before and after the Sarbanes-Oxley Act.” I would like to thank Cam Harvey (the editor); John Graham (the co-editor); an anonymous associate editor; two anonymous referees; Bill Dale; Yaniv Grinstein; Randall Heron; Paul Irvine (dissertation committee member); Bjorn Jorgensen; Paul Laux; Erik Lie; James Linck (dissertation committee member); Stewart Mayhew; Jeffry Netter (dissertation committee chairman); Jonathan Sokobin; Chester Spatt; Kathleen Weiss-Hanley; David Yermack; and seminar participants at the American Economics Association Annual Meeting (New Orleans), the Securities and Exchange Commission, Florida State University, the University of Colorado, the University of Delaware, the University of Georgia, the University of South Carolina, the University of Wisconsin–Madison, the University of Delaware Option Backdating Symposium, and the Western Finance Association Annual Meeting (Big Sky, Montana). All errors are my own.


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.