Determinants of Responses to Underwater Employee Stock Options: Evidence from Traditional Repricings, 6&1 Exchanges and Makeup Grants

47 Pages Posted: 11 Aug 2005

See all articles by Valentina L. Zamora

Valentina L. Zamora

Seattle University - Albers School of Business and Economics

Date Written: July 2005

Abstract

While firms claim that 6&1 exchanges and makeup grants help realign incentives and retain employees, critics argue that these responses provide opportunities for managerial rent extraction. Moreover, scholars challenge that these alternative responses are chosen to avoid the expense associated with traditional repricings or to substitute for cash. I test these competing explanations by comparing 6&1 exchange firms with traditional repricing firms, and makeup grant firms with traditional repricing firms. Results indicate that 6&1 exchange firms have a greater need to realign employee incentive and makeup grant firms have a greater need to retain employees. I also find that firms having higher financial reporting concerns are more likely to choose 6&1 exchanges or makeup grants over traditional repricings. Also, firms with stronger governance structures choose 6&1 exchanges and firms with less dividend constraints choose makeup grants. Overall, these findings suggest that economic reasons drive alternative responses to underwater stock options.

JEL Classification: J33, G34, M41

Suggested Citation

Zamora, Valentina L., Determinants of Responses to Underwater Employee Stock Options: Evidence from Traditional Repricings, 6&1 Exchanges and Makeup Grants (July 2005). Available at SSRN: https://ssrn.com/abstract=775124 or http://dx.doi.org/10.2139/ssrn.775124

Valentina L. Zamora (Contact Author)

Seattle University - Albers School of Business and Economics ( email )

901 12th Avenue
P.O. Box 222000
Seattle, WA 98122-1090
United States
206-296-5703 (Phone)

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