Private Information, Earnings Manipulations, and Executive Stock Option Exercises

53 Pages Posted: 8 Oct 2008

See all articles by Eli Bartov

Eli Bartov

NYU Stern School of Business

Partha S. Mohanram

Rotman School of Management, University of Toronto

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

This paper investigates the decision by top-level executives of more than 1,200public corporations to exercise large stock option awards in the period 1992-2001. Wehypothesize and find that abnormally large option exercises predict stock return futureperformance. 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 disappointingearnings 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.

Keywords: Executive compensation, Incentives, Stock option exercises, Earnings management

Suggested Citation

Bartov, Eli and Mohanram, Partha S., Private Information, Earnings Manipulations, and Executive Stock Option Exercises (April 2004). NYU Working Paper No. 2451/27566, Available at SSRN: https://ssrn.com/abstract=1280729

Eli Bartov (Contact Author)

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

Partha S. Mohanram

Rotman School of Management, University of Toronto ( email )

Canada

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