FIN-02-014 |
NYU Stern School of Business |
April 2002
Menachem Brenner, Rangarajan Sundaram and David Yermack
ABSTRACT
We study executive stock options that permit the option holder to rescind an exercise decision, returning the shares acquired to the company and obtaining a refund of the exercise price. Rescissions occurred at a number of U.S. companies in 2000 after the large decline in internet stocks, and have been widely condemned as a weakening of incentives. To the contrary, we find that in many situations rescindable options dominate ordinary options by delivering greater value and stronger incentives to the employee at a lower cost to the firm. The attractiveness of rescinable options arises as a consequence of the income tax treatment of most executive stock options in the U.S.
Menachem Brenner
Institution: Leonard N. Stern School of Business, New York University
Telephone: 212-998-0323
Fax: 212-995-4233
Email: mbrenner@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~mbrenner
Rangarajan K. Sundaram
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0308
Fax: (212) 995-4233
Email: rsundara@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~rsundara
David Yermack
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0357
Fax: (212) 995-4220
Email: dyermack@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~dyermack
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