Option Repricing and Incentive Realignment

47 Pages Posted: 9 Feb 2004

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Naveen D. Daniel

Drexel University - Department of Finance

Lalitha Naveen

Temple University - Department of Finance

Date Written: January 4, 2004

Abstract

We provide evidence that firms reprice out-of-the-money executive stock options in order to realign managerial incentives. A sharp decline in stock price, by reducing the sensitivity of executive pay to firm performance (delta) and, in many cases, increasing sensitivity of executive pay to stock-return volatility (vega), can cause managerial incentives to depart from optimal or target levels. Our results suggest that increasing delta does not appear to be a strong motivation for repricing. Rather, we find strong evidence that firms reprice executive options to reduce risk-taking incentives (vega) toward the target level.

Keywords: Option, repricing, incentive, compensation, vega, delta

JEL Classification: G34, J33

Suggested Citation

Coles, Jeffrey L. and Daniel, Naveen D. and Naveen, Lalitha, Option Repricing and Incentive Realignment (January 4, 2004). Available at SSRN: https://ssrn.com/abstract=497142 or http://dx.doi.org/10.2139/ssrn.497142

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Naveen D. Daniel (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
492
Abstract Views
3,679
rank
68,544
PlumX Metrics