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Voluntary disclosures and the exercise of CEO stock options

Author

Listed:
  • Brockman, Paul
  • Martin, Xiumin
  • Puckett, Andy

Abstract

We examine voluntary disclosures around the exercise of CEO stock options. Previous research shows that managerial incentives depend on the intended disposition of the exercised options' underlying shares. When CEOs intend to sell the underlying shares of exercised options, they have an incentive to increase stock prices in the pre-exercise period. In contrast, when CEOs intend to hold the underlying shares, they have a tax incentive to decrease stock prices in the pre-exercise period. Consistent with these private incentives, we find a significant increase in the frequency and magnitude of good (bad) news announcements in the pre-exercise period when CEOs implement exercise-and-sell (exercise-and-hold) strategies. We provide some evidence that CEOs' propensities for opportunistic disclosures are positively related to the value of their exercised stock options. Lastly, we find that the Sarbanes-Oxley Act (SOX) generally reduces, but does not eliminate, this type of managerial opportunism.

Suggested Citation

  • Brockman, Paul & Martin, Xiumin & Puckett, Andy, 2010. "Voluntary disclosures and the exercise of CEO stock options," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 120-136, February.
  • Handle: RePEc:eee:corfin:v:16:y:2010:i:1:p:120-136
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    References listed on IDEAS

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    1. Carpenter, Jennifer N & Remmers, Barbara, 2001. "Executive Stock Option Exercises and Inside Information," The Journal of Business, University of Chicago Press, vol. 74(4), pages 513-534, October.
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    3. Qiang Cheng & Kin Lo, 2006. "Insider Trading and Voluntary Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 815-848, December.
    4. Murphy, Kevin J., 2003. "Stock-based pay in new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 129-147, January.
    5. Brockman, Paul & Khurana, Inder K. & Martin, Xiumin, 2008. "Voluntary disclosures around share repurchases," Journal of Financial Economics, Elsevier, vol. 89(1), pages 175-191, July.
    6. Robert Brooks & Don M. Chance & Brandon Cline, 2012. "Private Information and the Exercise of Executive Stock Options," Financial Management, Financial Management Association International, vol. 41(3), pages 733-764, September.
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    8. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
    9. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
    10. Dhaliwal, Dan & Erickson, Merle & Heitzman, Shane, 2009. "Taxes and the backdating of stock option exercise dates," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 27-49, March.
    11. Huddart, Steven & Lang, Mark, 2003. "Information distribution within firms: evidence from stock option exercises," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 3-31, January.
    12. Erik Lie, 2005. "On the Timing of CEO Stock Option Awards," Management Science, INFORMS, vol. 51(5), pages 802-812, May.
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    1. repec:bla:indres:v:56:y:2017:i:3:p:427-458 is not listed on IDEAS
    2. repec:eee:jocaae:v:9:y:2013:i:1:p:100-121 is not listed on IDEAS

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