Accrual Management and the Decision to Hold the Shares Acquired from the Exercise of Executive Stock Options

Abstract

This study extends the employee stock option literature by examining the impact of accrual management both prior to and following stock option exercise to examine its effect on the decision to hold shares from option exercise. We find evidence that accrual management prior to exercise is negatively associated with the decision to hold shares for at least 30 days, while accrual management following exercise is positively associated with the decision to hold shares for at least a year. These results suggest that insiders adopt different earnings management strategies related to the decision to sell or hold shares over different horizons. In addition, our evidence that post-exercise accrual management is positively associated with the decision to continue holding shares extends prior research suggesting that insiders are motivated to hold shares based on private information. Finally, we find that the relation between accrual management and long window hold decisions is different for incentive stock options (ISOs) as compared to non-qualified stock options (NQSOs), consistent with individual tax incentives influencing this relation.