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

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  • DAVID C. CICERO

Abstract

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. Copyright (c) 2009 the American Finance Association.

Suggested Citation

  • David C. Cicero, 2009. "The Manipulation of Executive Stock Option Exercise Strategies: Information Timing and Backdating," Journal of Finance, American Finance Association, vol. 64(6), pages 2627-2663, December.
  • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2627-2663
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    Cited by:

    1. Korczak, Piotr & Liu, Xicheng, 2014. "Managerial shareholding policies and retention of vested equity incentives," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 116-129.
    2. repec:oup:revfin:v:21:y:2017:i:1:p:7-31. is not listed on IDEAS
    3. Alex Edmans & Luis Goncalves-Pinto & Yanbo Wang & Moqi Xu, 2014. "Strategic News Releases in Equity Vesting Months," NBER Working Papers 20476, National Bureau of Economic Research, Inc.
    4. Lee Biggerstaff & David C. Cicero & Andy Puckett, 2013. "Unethical Culture, Suspect CEOs and Corporate Misbehavior," NBER Working Papers 19261, National Bureau of Economic Research, Inc.
    5. Izhakian, Yehuda & Yermack, David, 2017. "Risk, ambiguity, and the exercise of employee stock options," Journal of Financial Economics, Elsevier, vol. 124(1), pages 65-85.
    6. Bradley, Daniel & Cline, Brandon N. & Lian, Qin, 2014. "Class action lawsuits and executive stock option exercise," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 157-172.
    7. Chester Spatt, 2014. "Security Market Manipulation," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 405-418, December.
    8. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
    9. Ilona Babenko & Rik Sen, 2016. "Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans," Management Science, INFORMS, vol. 62(7), pages 1878-1898, July.
    10. Vicky Henderson & Kamil Klad'ivko & Michael Monoyios, 2017. "Executive stock option exercise with full and partial information on a drift change point," Papers 1709.10141, arXiv.org.
    11. Chyz, James A., 2013. "Personally tax aggressive executives and corporate tax sheltering," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 311-328.
    12. David Yermack, 2015. "Corporate Governance and Blockchains," NBER Working Papers 21802, National Bureau of Economic Research, Inc.
    13. Hongfei Tang, 2014. "Are CEO stock option grants optimal? Evidence from family firms and non-family firms around the Sarbanes–Oxley Act," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 251-292, February.
    14. Biggerstaff, Lee & Cicero, David C. & Puckett, Andy, 2015. "Suspect CEOs, unethical culture, and corporate misbehavior," Journal of Financial Economics, Elsevier, vol. 117(1), pages 98-121.
    15. repec:bla:indres:v:56:y:2017:i:3:p:427-458 is not listed on IDEAS
    16. repec:bla:abacus:v:52:y:2016:i:4:p:685-771 is not listed on IDEAS

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