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|Title: ||On The Optimality of Resetting Executive Stock Options|
|Authors: ||Acharya, Viral|
Sundaram, Rangarajan K.
|Issue Date: ||8-Dec-1999 |
|Series/Report no.: ||FIN-99-087|
|Abstract: ||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. We find that although the
anticipation of resetting will typically result in a negative effect on
initial incentives, resetting can still be an important, value-enhancing
aspect of compensation contracts, even from an ex-ante standpoint.
Indeed, we find a precise sense that some resetting is almost always
optimal. We also characterize the conditions that affect the relative
optimality resetting. We find, for example, that the relative advantages
of resetting decrease as managerial ability to influence the resetting
process increases, as the relative importance of external (industry-or
economy-wide) factors in return generation increase, and as the direct
or indirect cost of replacing the incumbent manager decrease. Our
analysis, in summary, that the case against resetting is quite weak.|
|Appears in Collections:||Finance Working Papers|
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