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Altering the terms of executive stock options

2000; Elsevier BV; Volume: 57; Issue: 1 Linguagem: Inglês

10.1016/s0304-405x(00)00052-0

1879-2774

Menachem Brenner, Rangarajan K. Sundaram, David Yermack,

Capital Investment and Risk Analysis

We examine the practice of resetting the terms of previously-issued executive stock options. We identify properties of reset options, develop a model for valuing resettable options, and characterize the firms that have reset options. We find the vast majority of options are reset at-the-money, resulting, on average, in the strike price dropping 40%. Our valuation model suggests that resetting has only a small impact on the ex-ante value of an option award, but the ex-post gain can be substantial. Finally, we find resetting has a strong negative relation with firm performance even after correcting for industry performance.