Structure of Option Repricings: Determinants and Consequences
Posted: 20 Jan 2004
Date Written: January 2004
I present a novel dataset of over 4,000 firm-level repricings of executives and employees' stock options over the period 1987-2002. For a sub-sample of 587 repricings characterized by a homogeneous institutional environment, I investigate determinants and consequences of the structure of the repricing offer, defined in terms of: i) eligibility criteria (i.e. who is eligible to participate?), ii) economic terms (e.g. new exercise price, number of new options granted in replacement of each underwater option), and iii) exerciseability conditions (e.g. restarted vesting schedule, other retention-enhancing features).
Overall, I find significant evidence of managerial self-serving behavior in certain aspects of the design of the repricing offer. In particular: i) more visible firms, with stronger corporate governance, are more likely to exclude executives from the repricing offer; ii) retention-enhancing features (which reduce the value of the options) are significantly less likely when executives' options are repriced than in employee-only repricings; iii) repricings are timed just before significant price run-ups when the CEO participates in the repricing, but not in employee-only repricings; iv) higher institutional ownership is associated with economic terms less favorable to executives and stricter exerciseability conditions. The choice of economic terms and exerciseability conditions seems to mostly depend on economic determinants. In particular, firms are more likely to offer a partial repricing when there is a deeper underwater problem, while retention-enhancing features are more frequent when there is a higher perceived retention risk and better outside employment opportunities. Finally, I find weak evidence of a decrease in employee turnover after the repricing, but the extent of such decrease does not seem to depend on the structure of the repricing offer.
Beside contributing to the literature on option repricings, these results may be of interest to investors called to vote upon repricing proposals by recent NYSE and NASDAQ rules requiring mandatory shareholder approval for all repricings - unless explicitly authorized by the stock option plan.
Keywords: option repricing, employee stock options, employee retention
JEL Classification: G34, M52, J33, G12, K22
Suggested Citation: Suggested Citation