Altering the Terms of Executive Stock Options
This paper examines the practice of resetting of the terms of previously-issued executive stock options. We identify the properties of the typical reset option, characterize the firms that have reset options, and develop a model to value options that may be reset. In our sample of 396 executives whose options had terms reset in 1992-95 period, a large majority had exercise prices reset to the market price. This resulted in a reduction of the typical option's exercise price by about 40%. Slightly less than half of these options also had their maturities extended, generally receiving a new expiration of 10 years. We find that resetting has a strong negative relationship with firm performance even after correcting for industry performance. Resetting is also significantly more common among small firms than among large firms. However, few other industry- or firm-specific factors appear to matter. Finally, we find that the possibility of resetting does not have a large impact on the ex-ante value of an option award, but the ex-post gain can be substantial.
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|Date of creation:||08 Feb 1998|
|Date of revision:|
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Web page: http://w4.stern.nyu.edu/finance/
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- Brenner, Menachem & Sundaram, Rangarajan K. & Yermack, David, 2000.
"Altering the terms of executive stock options,"
Journal of Financial Economics,
Elsevier, vol. 57(1), pages 103-128, July.
- Menachem Brenner & Rangarajan K. Sundaram & David Yermack, 1998. "Altering the Terms of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-010, New York University, Leonard N. Stern School of Business-.
- David Yermack, 1996.
"Good Timing: CEO Stock Option Awards and Company News Announcements,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-41, New York University, Leonard N. Stern School of Business-.
- Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-76, June.
- Seyhun, H Nejat, 1992. "The Effectiveness of the Insider-Trading Sanctions," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 149-82, April.
- Mark Rubinstein., 1994. "On the Accounting Valuation of Employee Stock Options," Research Program in Finance Working Papers RPF-241, University of California at Berkeley.
- Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Gilson, Stuart C & Vetsuypens, Michael R, 1993. " CEO Compensation in Financially Distressed Firms: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 48(2), pages 425-58, June.
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