Decomposing Executive Stock Option Exercises : Relative Information and Incentives to Manage Earnings

This paper examines the information content of stock option exercises versus regular insider share trades by corporate executives. We argue that the asymmetric payoff structure of options makes managerial wealth – compared to holdings of shares – relatively more sensitive to stock price changes and more likely induces opportunistic behaviour. Consistent with our predictions, we find option exercises followed by share liquidations are associated with disappointing future earnings news, while sales of previously held shares are not. In addition, liquidation exercises of deep in-the-money options are associated with larger income-increasing abnormal accruals, signalling lower quality earnings. On the buy side, we find that regular insider share purchases are associated with positive future earnings news while purchases through option conversions are not. This research has implications for investors, compensation committees, and future research on corporate insider trades