Abstract

Stock options are supposed to align CEOs interests with those of shareholders. However, CEOs may behave opportunistically when their incentives become very sensitive i.e. when they have options that are about to expire. I investigate whether CEO exercise decisions affect the contents and timing of annual earnings announcements. I show that earnings are more likely to exceed analyst forecasts when CEOs exercise their options close to expiry shortly after the announcements. The likelihood of positive earnings surprise is higher when option exercises are followed by stock sales. I then examine the timing of earnings announcements. The results show that companies accelerate earnings announcements when CEOs exercise their stock options shortly after those announcements, especially when the obtained shares are sold. Finally, I investigate the relation between the incentives given by stock option exercises made close to expiry and the level of accruals. I find a higher level of discretionary accruals when CEOs have to exercise options that are about to expire.