IDEAS home Printed from https://ideas.repec.org/p/cdf/wpaper/2008-4.html
   My bibliography  Save this paper

Private Information in Executives' Option Trades: Evidence from the UK

Author

Listed:
  • Kyriacou, Kyriacos
  • Luintel, Kul B

    () (Cardiff Business School)

  • Mase, Bryan

Abstract

This paper investigates whether UK executives use private information in the trading decisions associated with the exercise of their executive stock options. We find that UK executives' exercise and sell decisions are motivated by their private information but not by their anticipation of future return volatility. These findings appear robust when we control for additional motivating factors that include option moneyness, the previous stock return and the value of the exercise. We argue that the disparity in the informativeness of US and UK executives' trades at exercise is related to important differences in executive remuneration, and in the regulation and taxation of executive stock options.

Suggested Citation

  • Kyriacou, Kyriacos & Luintel, Kul B & Mase, Bryan, 2008. "Private Information in Executives' Option Trades: Evidence from the UK," Cardiff Economics Working Papers E2008/4, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2008/4
    as

    Download full text from publisher

    File URL: http://carbsecon.com/wp/E2008_4.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Lisa Meulbroek, 2001. "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Financial Management, Financial Management Association, vol. 30(2), Summer.
    2. Hall, Brian J. & Murphy, Kevin J., 2002. "Stock options for undiversified executives," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 3-42, February.
    3. Eugene F. Fama & Kenneth R. French, 1998. "Value versus Growth: The International Evidence," Journal of Finance, American Finance Association, vol. 53(6), pages 1975-1999, December.
    4. Ke, Bin & Huddart, Steven & Petroni, Kathy, 2003. "What insiders know about future earnings and how they use it: Evidence from insider trades," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 315-346, August.
    5. Dirk Jenter, 2005. "Market Timing and Managerial Portfolio Decisions," Journal of Finance, American Finance Association, vol. 60(4), pages 1903-1949, August.
    6. K. Geert Rouwenhorst, 1998. "International Momentum Strategies," Journal of Finance, American Finance Association, vol. 53(1), pages 267-284, February.
    7. Frankel, Richard & Li, Xu, 2004. "Characteristics of a firm's information environment and the information asymmetry between insiders and outsiders," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 229-259, June.
    8. Sandra Renfro Callaghan & P. Jane Saly & Chandra Subramaniam, 2004. "The Timing of Option Repricing," Journal of Finance, American Finance Association, vol. 59(4), pages 1651-1676, August.
    9. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    10. Piotroski, Joseph D. & Roulstone, Darren T., 2005. "Do insider trades reflect both contrarian beliefs and superior knowledge about future cash flow realizations?," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 55-81, February.
    11. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    12. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    13. Tian, Yisong S., 2004. "Too much of a good incentive? The case of executive stock options," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1225-1245, June.
    14. Bettis, J. C. & Coles, J. L. & Lemmon, M. L., 2000. "Corporate policies restricting trading by insiders," Journal of Financial Economics, Elsevier, vol. 57(2), pages 191-220, August.
    15. Allen M. Poteshman & Vitaly Serbin, 2003. "Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options," Journal of Finance, American Finance Association, vol. 58(1), pages 37-70, February.
    16. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2005. "Exercise behavior, valuation, and the incentive effects of employee stock options," Journal of Financial Economics, Elsevier, vol. 76(2), pages 445-470, May.
    17. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, February.
    18. Alan Gregory, 2005. "The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 777-814.
    19. Kevin J. Murphy & Brian J. Hall, 2000. "Optimal Exercise Prices for Executive Stock Options," American Economic Review, American Economic Association, vol. 90(2), pages 209-214, May.
    20. 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.
    21. Sylvain Friederich & Alan Gregory & John Matatko & Ian Tonks, 2002. "Short-run Returns around the Trades of Corporate Insiders on the London Stock Exchange," European Financial Management, European Financial Management Association, vol. 8(1), pages 7-30.
    22. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    23. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, June.
    24. Eugene F. Fama & Kenneth R. French, 2006. "The Value Premium and the CAPM," Journal of Finance, American Finance Association, vol. 61(5), pages 2163-2185, October.
    25. Chauvin, Keith W. & Shenoy, Catherine, 2001. "Stock price decreases prior to executive stock option grants," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 53-76, March.
    26. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2001. "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(03), pages 345-370, September.
    27. 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.
    28. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    29. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    30. Leslie A. Jeng & Andrew Metrick & Richard Zeckhauser, 2003. "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 453-471, May.
    31. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Executive remuneration; executive stock options; trade informativeness;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdf:wpaper:2008/4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yongdeng Xu). General contact details of provider: http://edirc.repec.org/data/ecscfuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.