Menachem Brenner, Rangarajan K Sundaram, David Yermack
ABSTRACT
This paper examines the practice of resetting of the terms of previously-issued
executive stock options. We identify the properties of the typical reset
option, characterize the firms that have reset options, and develop a model
to value options that may be reset. In our sample of 396 executives whose
options had terms reset in 1992-95 period, a large majority had exercise
prices reset to the market price. This resulted in a reduction of the typical
option's exercise price by about 40%. Slightly less than half of these
options also had their maturities extended, generally receiving a new expiration
of 10 years. We find that resetting has a strong negative relationship
with firm performance even after correcting for industry performance. Resetting
is also significantly more common among small firms than among large firms.
However, few other industry- or firm-specific factors appear to matter.
Finally, we find that the possibility of resetting does not have a large
impact on the ex-ante value of an option award, but the ex-post gain can
be substantial.
Subject: Valuation, Executive Stock Options, Investments/Derivatives (Theoretical, empirical)
Brenner: (212) 998-0323 mbrenner@stern.nyu.edu
Sundaram: (212) 998-0308 rsundara@stern.nyu.edu
Yermack: (212) 998-0357 dyermack@stern.nyu.edu
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