TAILIEUCHUNG - Altering the terms of executive stock options

Proudhon represents speculation as a type of production. However, like all human activity it can be misused – “unproductive speculation,” the stock market acting as, “the temple,” for this ritual. He adds that unproductive speculation is an inherent part of the economic system. He provides several examples of speculative transactions in order to show the reader the economic necessity of one of them - ―productive speculation‖ – a high-risk activity but one which is the motor of economic growth, and to demonstrate the economic perversity of the other – ―the unproductive‖ – a risky activity but also a sterile one. | ELSEVIER Journal of Financial Economics 57 2000 103-128 JOURNALOF Bnanod ECONOMICS WWW. else vier. com locate econbase Altering the terms of executive stock options Menachem Brenner Rangarajan K. Sundaram David Yermack Department of Finance Stern School of Business New York University New York NY USA Received 26 August 1998 received in revised form 15 October 1998 Abstract 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 nd 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 nd resetting has a strong negative relation with rm performance even after correcting for industry performance. 2000 Elsevier Science . All rights reserved. JEL classification G12 G13 G32 Keywords Executive stock options Executive compensation Resetting Repricing Valuation 1. Introduction Executive stock options have long been touted as an effective way of reducing agency costs by aligning managers interests with those of shareholders. We would like to thank Jennifer Carpenter Don Chance N. Prabhala William Silber and participants in seminars at Boston University Case Western Reserve University New York University the Summer 1998 Accounting and Finance Conference at Tel-Aviv University and the April 1999 Derivatives Conference in Boston University. Corresponding author. Tel. 1-212-9980357 fax 1-212-9954220. E-mail address dyermack@ D. Yermack . 0304-405X 00 - see front matter 2000 Elsevier Science . All rights reserved. PII S 0 3 0 4 - 4 0 5 X 0 0 0 0 0 5 2 - 0 104 M. Brenner et al. Journal of Financial Economics 57 2000 103-128 Although these options are typically issued with xed .

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