Executive Stock Option Exercises and the Predictive Ability of Transaction Value

Abstract

This paper investigates the predictive ability of executives’ stock option exercises by categorising all exercises by the overall value of the transaction. This measure incorporates the cost to the executive of exercising the option, together with the income generated by the associated sale of stock at the time of exercise. As a result, we show that, in contrast to the existing literature, executive stock option exercises do have predictive ability for future stock returns. This is, however, limited to transactions that generate net revenue for the executive, a finding that is the reverse of the evidence relating to standard executive transactions.