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IT Recruiter Magazine

Employee stock trades reveal company's prospects

September-October 2001

Workers, even low-level ones, may know more about their employer's business prospects than expected. They seem to exercise stock options as though gazing into a crystal ball.

That's the finding of a recent study by researchers Steven J. Huddart of Penn State [] and Mark Lang at the University of North Carolina - Chapel Hill [], who wanted to see if employee stock option decisions would predict future stock returns.

They did. When lots of options are being exercised (i.e., company stock is being sold), returns in the next six months are 10 percent lower than when employees are holding onto their stock and not exercising their options.

This holds true even for worker bees, whose stock-trading activities have typically been ignored while the public watches executives' buying and selling like hawks.

As a result, the researchers suggest management might want to pay more attention to their workers' stock option choices. "The exercise decisions of many employees, do, on average, contain substantial information about a firm's prospects," Huddart says.


Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
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