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Executive Stock Option Exercises and Inside Information

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  • Jennifer N. Carpenter
  • Barbara Remmers

Abstract

Insider option exercises from 1984 to 1990 precede significantly positive abnormal stock returns. During this period, the SEC required insiders to hold the shares acquired through option exercise for at least six months. In May 1991, the SEC removed this restriction. Using a model of optimal exercise which allows for differential income and capital gains taxes, we show that if the executive can sell the acquired shares immediately after exercise, then bad news can trigger an exercise but good news cannot. Consequently, the used of private information should manifest itself as negative post-exercise abnormal stock price performance. Empirically, we find that post-exercise abnormal returns are insignificant in the current regulatory regime. At least with regard to their exercise policies, insiders' informational advantage appears to have little impact on executive stock option value.

Suggested Citation

  • Jennifer N. Carpenter & Barbara Remmers, 1999. "Executive Stock Option Exercises and Inside Information," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-007, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:99-007
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    Cited by:

    1. Eli Ofek & Matthew Richardson, 2000. "The IPO Lock-Up Period: Implications for Market Efficiency And Downward Sloping Demand Curves," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-054, New York University, Leonard N. Stern School of Business-.

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