An Examination of Executive Stock Option Repricing

Posted: 5 Mar 2001

See all articles by Mary Ellen Carter

Mary Ellen Carter

Boston College - Department of Accounting

Luann J. Lynch

University of Virginia - Darden School of Business

Abstract

In this study, we examine factors that explain firms' decisions to reprice stock options. Comparing a sample of firms that reprice executive stock options in 1998 to a control sample of firms with out-of-the-money options in 1998 that choose not to reprice, we find that young, high technology firms are more likely to reprice than other firms. In addition, we find that the likelihood of repricing increases as options become more out-of-the-money, and that firms reprice in response to poor firm-specific performance, not poor industry performance. These results are not consistent with claims that firms reprice to insulate management from uncontrollable industry effects. However, we find no relation between the likelihood of repricing and conflicts of interest between executives and shareholders, suggesting that repricing is not related to agency problems. The results are consistent with the often stated motivation that firms must reprice out-of-the-money options to restore the incentive effects of those options and to prevent management in competitive labor markets from going to work for other firms.

Keywords: Repricing; Executive compensation; Stock options

JEL Classification: G30, J33

Suggested Citation

Carter, Mary Ellen and Lynch, Luann J., An Examination of Executive Stock Option Repricing. Available at SSRN: https://ssrn.com/abstract=258822

Mary Ellen Carter (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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