Private Information, Earnings Manipulations, and Executive Stock Option Exercises

By Eli Bartov, Partha Mohanram. 2004

465 citations recorded by the source corpus.

This paper investigates the decision by top‐level executives of more than 1,200 public corporations to exercise a large number of stock option awards in the period 1992–2001. We hypothesize and find that abnormally large option exercises predict stock return future performance. We then hypothesize that this predictive ability represents private information about disappointing earnings in the post‐exercise period. Consistent with this hypothesis we find that abnormally positive earnings performance in the pre‐exercise period turns to disappointing earnings performance in the post‐exercise period, and that this pattern comes as a surprise to even sophisticated market participants (financial analysts). We also hypothesize and find that the disappointing earnings in the post‐exercise period represent a reversal of inflated earnings in the pre‐exercise period. Collectively, these findings suggest that the private information used by top‐level executives to time abnormally large exercises follows from earnings ...

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e5b391bb7ff69b305e0f6c127c58779ae1bceee2

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Citations in the corpus

The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing (2009, background): “…to other questionable practices induced by extensive use of option-based pay such as the opportunistic timing of grant dates and opportunistic release of financial information around option grants and exercises (Aboody and Kasznik 2000; Bartov and Mohanram 2004; Ferri 2005; Yermack 1997).”
Jeopardy, Non-Public Information, and Insider Trading Around SEC 10-K and 10-Q Filings (2005, unknown): “Bartov and Mohanram (2004) present evidence that is consistent with executives reporting inflated earnings prior to option exercises, followed by a pattern of lower-than-expected earnings after exercise, which represents a reversal of the earlier inflation.”
Accounting Discretion, Corporate Governance, and Firm Performance* (2008, unknown): “8 benchmarks (unwarranted by the firm’s underlying economic performance) in order to temporarily boost stock price, exercise his options, safeguard his bonus (Matsunaga and Park 2001, Bartov and Mohanram 2003) or his job (Matsunaga and Park 2002; Farrell and Whidbee 2003). In the remainder of the pa”
Internal Control Over Financial Reporting and Managerial Rent Extraction: Evidence from the Profitability of Insider Trading (2013, background): “For example, prior research suggests managers sell shares at inflated prices when discretionary accruals are used to increase earnings (e.g., Beneish and Vargus 2002; Bartov and Mohanram 2004).”
Why do CFOs Become Involved in Material Accounting Manipulations (2011, unknown): “, Bartov and Mohanram, 2004; Cheng and Warfield, 2005; McVay, Nagar and Tang, 2006; Burns and Kedia, 2006). On the other hand, Jiang et al. (2010)”
Accounting Anomalies and Fundamental Analysis: A Review of Recent Research Advances (2010, background): “, Bartov and Mohanram, 2004 and Bartov, et al. 2007). Another example is Li (2008) who computes measures of ‘readability’ of the annual report and documents that firms with easier to read financial reports have more persistent earnings.”
Trading incentives to meet the analyst forecast (2006, background): “Recent studies have focused on ‘‘abnormal’’ insider trading (e.g., Bartov & Mohanram, 2004; Beneish et al., 2004); by including lagged insider sales, we are effectively conducting a similar test.”
Earnings Management Using Classification Shifting: an Examination of Core Earnings and Special Items (2006, unknown): “One incentive to manage earnings is to temporarily maximize stock price (e.g., Rangan 1998; Teoh et al. 1998; Bartov and Mohanram 2004).”