Short Selling and Executive Stock Option Exercises

ABSTRACT This study investigates whether short sellers trade on the information conveyed by top executives’ abnormally large stock option exercises. Executives possess private information and maximize their wealth by strategically timing the exercise of their stock options. Although short sellers are considered sophisticated investors who frequently trade on informational advantages, it remains unclear whether they react to signals embedded in executives’ large option exercises. Using a newly available dataset of daily short‐sales volume, our results show a positive and significant relationship between daily abnormal short volume and executives’ abnormally large stock option exercise events. This positive relationship is mainly driven by NASDAQ‐listed firms. Furthermore, the increase in short‐selling activity on the exercise day suggests that short sellers have access to nonpublic information, as option exercises typically precede public disclosure of such information. Additionally, short sellers’ selling activity increases regardless of whether executives sell the acquired shares, implying that the option exercise itself, rather than the selling or holding of the shares, serves as the key signal. Lastly, additional cross‐sectional analyses show that the information environment, prior firm performance, and the magnitude of option exercise moderate the relationship between short selling and abnormally large option exercise events. The observed synchronicity between peak short‐selling activity and abnormally large option exercises suggests that short sellers respond to informational signals contained in executives’ option exercise decisions, thereby improving market information efficiency.