IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Contract Renegotiation and the Optimality of resetting Executive Stock Options

Listed author(s):
  • Viral V. Acharya
  • Kose John
  • Rangarajan K. Sundaram

Recent empirical work has documented the tendency of corporations to reset strike prices on previously-awarded executive stock option grants when declining stock prices have pushed these options out-of-the-money. This practice has been criticized as counter-productive since it weakens incentives present in the original award. This paper sets up a theoretical model for study of this issue. We find that when the menu of compensation contracts is unlimited, resetting cannot increase, and may actually reduce, shareholder value. In more realistic settings, however, when only commonly-observed compensation instruments may be used, we find that allowing for the possibility of resetting can, in fact, result in increased shareholder value; we identify specific conditions on the effort-aversion of the manger under which this is the case. We also find that the relative importance of resetting may increase as the impact of external (economy-or industry-wide) factors on the firm's performance increases; this offers one possible explanation of why resetting has been far more common in small firms than large ones. Finally, we also analyze the relationship between the relative optimality of resetting and managerial control over returns generation. In summary, our results suggest that current criticism of the practice of resetting may be misguided, and that resetting may be a value-enhancing aspect of corporate compensation contracts.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-088.

in new window

Date of creation: 09 Dec 1998
Handle: RePEc:fth:nystfi:98-088
Contact details of provider: Postal:
U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126

Phone: (212) 998-0100
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fth:nystfi:98-088. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.