Private Information, Earnings Manipulations, and Executive Stock-Option Exercises

This paper investigates the decision by top-level executives of more than 1,200 public corporations to exercise a large number of stock option awards in the period 1992-2001. We hypothesize and find that abnormally large option exercises predict stock return future performance. We then hypothesize t...

Full description

Saved in:
Bibliographic Details
Published in:The Accounting review 2004-10, Vol.79 (4), p.889-920
Main Authors: Bartov, Eli, Mohanram, Partha
Format: Article
Language:English
Subjects:
Accounting
Analytical forecasting
Business structures
Capital market
Cash
Correlation analysis
Earnings
Earnings forecasting
Executive compensation
Executives
Financial incentives
Grants
Information management
Management
Net income
Options on stocks
Rates of return
Ratios
Stock exchange
Stock options
Stock prices
Studies
Wages
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper investigates the decision by top-level executives of more than 1,200 public corporations to exercise a large number of stock option awards in the period 1992-2001. We hypothesize and find that abnormally large option exercises predict stock return future performance. We then hypothesize that this predictive ability represents private information about disappointing earnings in the post-exercise period. Consistent with this hypothesis we find that abnormally positive earnings performance in the pre-exercise period turns to disappointing earnings performance in the post-exercise period, and that this pattern comes as a surprise to even sophisticated market participants (financial analysts). We also hypothesize and find that the disappointing earnings in the post-exercise period represent a reversal of inflated earnings in the pre-exercise period. Collectively, these findings suggest that the private information used by top-level executives to time abnormally large exercises follows from earnings management so as to increase the cash payout of exercises.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr.2004.79.4.889