Private information, earnings manipulations, and executive stock-option exercises.

ABSTRACT: This paper investigates the decision by dint of top-level executives of more than 1200 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 turn back future performance. We then hypothesize that this predictive ability exhibits 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 turn rounds to disappointing earnings performance in the post-exercise period, and that this pattern approachs as a surprise to flat sophisticated market participants (financial analysts). We also