Determinants of Responses to Underwater Employee Stock Options: Evidence from Traditional Repricings, 6&1 Exchanges and Makeup Grants
47 Pages Posted: 11 Aug 2005
Date Written: July 2005
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: Suggested Citation