On Rescissions in Executive Stock Options

31 Pages Posted: 27 May 2002

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: April 15, 2002

Abstract

We study executive stock options that permit the option holder to rescind an exercise decision, returning the shares acquired to the company and obtaining a refund of the exercise price. Rescissions occurred at a number of U.S. companies in 2000 after the large decline in internet stocks, and have been widely condemned as a weakening of incentives. To the contrary, we find that in many situations rescindable options dominate ordinary options by delivering greater value and stronger incentives to the employee at a lower cost to the firm. The attractiveness of rescinable options arises as a consequence of the income tax treatment of most executive stock options in the U.S.

Keywords: rescissions, executive stock options, incentives, valuation, taxes

JEL Classification: G30, G34, G12, H20

Suggested Citation

Brenner, Menachem and Sundaram, Rangarajan K. and Yermack, David, On Rescissions in Executive Stock Options (April 15, 2002). Available at SSRN: https://ssrn.com/abstract=310899 or http://dx.doi.org/10.2139/ssrn.310899

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

David Yermack

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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