Private Information and the Exercise of Executive Stock Options

Authors

  • Robert Brooks,

  • Don M. Chance,

  • Brandon Cline

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    • Robert Brooks is a Professor of Finance at the University of Alabama in Tuscaloosa, AL. Don M. Chance is a Professor of Finance at Louisiana State University in Baton Rouge, LA. Brandon N. Cline is an Assistant Professor of Finance at Mississippi State University in Mississippi State, MS.


  • This paper was presented at the Financial Management Association and the Southern Finance Association meetings and at faculty seminars at the University of Alabama, West Virginia University, Clemson University, Seton Hall, Louisiana State University, the University of Alabama at Birmingham, the University of North Carolina at Charlotte, and Miami University. The authors appreciate the comments of David Yermack, Anup Agrawal, Bruce Barrett, Brian Carver, Doug Cook, John Finnerty, Xudong Fu, Daniel Bradley, Alexander Kurov, Raman Kumar, Laura Starks, Mike Lemmon, Qin Lian, John Olagues, Pam Peterson, Harris Schlesinger, Wei-Ling Song, Jonathan Stanley, Jun Wang, Jing Zhao, and an anonymous referee.

Abstract

This paper finds strong evidence that executives use private information when exercising their stock options. The most informed executives tend to exercise early, do not exercise on the vest date, do not exercise to capture dividends, exercise a high percentage of their options, and exercise when the option is the least in-the-money. We also find that exercises around resignation and retirement are followed by significant negative abnormal returns. Furthermore, the operating performance of firms following exercises motivated by private information is significantly worse than that of firms in which the exercises are not motivated by private information.

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