The Information Contained in the Exercise of Executive Stock Options
This paper investigates whether insiders use private information in their decision to exercise executive stock options. Consistent with existing research, exercises overall do not yield subsequent abnormal returns. Categorising exercises by the proportion of stock sold at exercise yields a marked and significant difference in subsequent performance between those accompanied by a â€˜highâ€™ and â€˜lowâ€™ sale proportion respectively. Further, near-the-money exercises produce negative abnormal returns, consistent with such exercises being expensive. The disparity in US and UK executivesâ€™ exercise behaviour may be related to the extent to which executive remuneration is linked to shareholder wealth, highlighting the difficulties associated with designing effective remuneration packages for executives
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