Private Information and the Exercise of Executive Stock Options

We find evidence that executives use private information in exercising stock options. The most informed executives exercise early, exercise after the vest date rather than at the vest date, do not exercise in anticipation of dividends, exercise a high percentage of their options, sell a large proportion of acquired stock, and exercise and leave the firm. The most costly options to exercise are associated with the most private information, and the least costly are associated with the least private information. We also find that higher ranked executives show significantly greater exploitation of private information than do lower ranked executives