EXECUTIVE STOCK OPTION EXERCISES, TAX, AND THE PREDICTIVE ABILITY OF TRANSACTION VALUE

Abstract

This paper investigates the impact of the tax regime on the predictive ability of UK executives' stock option exercises by categorizing all exercises by the value of the transaction. We use two measures, the net transaction value (which 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) and the value of the exercise (which is simply the cost of exercising the option). We show that, in contrast to the existing literature, executive stock option exercises do have predictive ability for future stock returns. This predictive ability relates to transactions that generate net revenue for the executive, a finding that is the reverse of the evidence relating to standard executive transactions, and consistent with a tax motive for executives' exercise behavior.