Option repricing and executive retention – revisited

2016 ◽  
Vol 15 (4) ◽  
pp. 499-517
Author(s):  
Sandra Renfro Callaghan ◽  
Chandra Subramaniam ◽  
Stuart Youngblood
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Control Sample ◽  
Stock Option ◽  
Executive Turnover ◽  
Content Type ◽  
Executive Stock Option ◽  
Managerial Talent ◽  
Option Repricing ◽  
Stock Option Repricing

Purpose This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention. Design/methodology/approach The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event. Findings It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years. Research limitations/implications Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good. Originality/value Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.

Cendant Corp.: A Case Study Examining the Compensation and Accounting Issues Involved in a Stock-Option Repricing Program

2001 ◽  
Vol 16 (3) ◽  
pp. 409-441 ◽  
Author(s):  
Thomas J. Vogel
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Poor Performance ◽  
Stock Option ◽  
Compensation Committee ◽  
Corporate Executives ◽  
Price Increases ◽  
Exercise Price ◽  
Option Repricing ◽  
Stock Option Repricing

Stock options are usually issued to corporate executives in an attempt to align the interests of those individuals with the interests of the company's shareholders. The options are designed to provide a large payoff to the executives when the company's stock price increases substantially above the exercise price of the options. However, in those periods when a company performs poorly, its stock price may decrease to a level below the exercise price of outstanding options. When this occurs, the options are said to be “underwater.” Because options provide a benefit only as the stock price increases, underwater options will often lack the motivational incentive that they were designed to create. This creates a dilemma to the compensation committee of the company—i.e., modify the compensation agreements of the individuals in charge during the period of poor stock price performance or risk losing those executives to other companies. One such modification that is often considered in these circumstances is a stock-option repricing program. Here, underwater stock options are exchanged for new options containing a lower exercise price. These programs experienced increased popularity during the 1990s despite the opposition that arose from critics who claimed that repricing programs “rewarda” executives for poor performance. This instructional case requires students to evaluate the appropriateness of a stock-option repricing program for the executives and other employees of Cendant Corp. This company experienced a severe decrease in its stock price during 1998 as a result of many factors including an accounting scandal, failed expansion efforts, and poor market conditions. In addition, the case material can also be used to introduce students to the accounting implications of stock-option repricing programs as modified by Interpretation No. 44, issued by the Financial Accounting Standards Board in March 2000.

Stock Option Repricing and Its Alternatives: An Empirical Examination

2009 ◽  
Vol 44 (6) ◽  
pp. 1459-1487 ◽  
Author(s):  
Swaminathan Kalpathy
Keyword(s):  
Human Capital ◽  
Stock Price ◽  
Conflicts Of Interest ◽  
Multinomial Logit ◽  
Agency Cost ◽  
Stock Option ◽  
Empirical Examination ◽  
Internal Governance ◽  
Option Repricing ◽  
Stock Option Repricing

AbstractIn this paper I examine the likelihood of CEO stock option repricing and its alternatives: namely, option grant, stock grant, and “do nothing.” Multinomial logit results suggest that firms reprice options to increase sensitivity of pay to stock price and to temper down sensitivity of pay to volatility. Moreover, repricing firms are younger and more concentrated in industries where human capital is important. Finally, I find no evidence that internal governance or executive conflicts of interest are relevant in explaining repricing. My results indicate that repricing is motivated by incentive alignment and retention, and not by agency cost considerations.

scholarly journals Executive stock options with a rebate: Valuation formula

2006 ◽  
Vol 3 (4) ◽  
pp. 76-79
Author(s):  
P.W.A. Dayananda
Keyword(s):  
Discrete Time ◽  
Continuous Time ◽  
Stock Price ◽  
Stock Options ◽  
Stock Option ◽  
Executive Stock Options ◽  
Exercise Time ◽  
Executive Stock Option ◽  
Exercise Period ◽  
Over Time

We examine the valuation of executive stock option award where there is a rebate at exercise. The rebate depends on the performance of the stock of the corporation over time the period concerned; in particular we consider the situation where the executive can purchase the stock at exercise time at discount proportional to the minimum value of the stock price over the exercise period. Valuation formulae are provided both when assessment is done in discrete time as well as in continuous time. Some numerical illustrations are also presented

Stock derivatives and seasoned equity offerings

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Robert Martin Hull ◽  
Sungkyu Kwak ◽  
Rosemary Walker
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Stock Options ◽  
Seasoned Equity Offerings ◽  
Stock Option ◽  
Fiscal Year ◽  
Equity Offerings ◽  
Past Performance ◽  
Content Type ◽  
Run Up

PurposeThe article aims to explore if stock derivative types (stock options and stock warrants) are associated with stock returns for firms undergoing seasoned equity offerings (SEOs).Design/methodology/approachThe authors regress stock returns against stock derivatives for periods around SEO announcements with standard errors clustered at the month level.FindingsThe authors find that lower stock derivatives holdings for the fiscal year after the SEO are associated with superior pre-SEO returns. This can be explained by owners exercising their derivatives to capitalize on the pre-SEO price run-up. The authors find that greater stock option holdings by insiders for the fiscal year after the SEO are associated with superior post-SEO returns for up to ten years after the SEO announcement. This new finding does not hold for stock warrants.Research limitations/implicationsStock derivatives are supplied by Capital IQ. Given their description, the authors infer that stock options are owned largely by insiders. Thus, the insider conclusions for stock options depend on this implication.Practical implicationsStock options and stock warrants can be used strategically to reward stock derivative owners of strong performing firms for past performance. Stock options can be used to motivate insiders (primarily key executives) to achieve superior future performance.Originality/valueThis study is unique in comparing the influence of holdings for stock options and stock warrants on stock price performance around SEOs. The authors show that the sign of the association depends on whether the test includes pre-SEO periods.

scholarly journals Stock options: do they influence dividend payments?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Janaina Muniz ◽  
Fernando Galdi ◽  
Felipe Storch Damasceno
Keyword(s):  
Stock Options ◽  
Design Methodology ◽  
Performance Metrics ◽  
Positive Association ◽  
Stock Option ◽  
Content Type ◽  
Executive Stock Option ◽  
Dividend Payments ◽  
Remuneration Policy ◽  
The Relationship

Purpose This study aims to investigate whether there is any influence of the option plan to purchase shares protected from dividends to determine the distribution of dividends in Brazilian companies. Design/methodology/approach The authors used a Tobit dynamic and regressive regression model because their sample has an index higher than 30% of companies that do not pay dividends. The sample includes companies that pay dividends or not and pay their executives with executive stock option plans and is composed of 1,990 observations from 356 companies from 2010 to 2016. Findings The results indicated that the presence of a dividend protection clause has a positive association with the distribution of dividends. The authors sought to clarify that companies with a stock option plan protected by the distribution of dividends face fewer restrictions on the distribution of dividends. The authors found that most companies still use only stock options to benefit middle-ranking positions and fit the plan in their remuneration policy. The monitoring of these plans lasts an average of seven years, and specific acquisition conditions are not established with their beneficiaries, who must remain in the company and observe performance metrics. Originality/value This study is relevant because the relationship between dividends and stock options has not yet been analyzed in Brazil, especially concerning a dividend-protected option plan, which is a relatively recent modality, even unknown to some companies.

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