Rescission and repricing of executive stock options: Repricing alternatives, optimal repricing policy, and early exercise

Abstract

This dissertation consists of two chapters. Chapter 1 examines the ex-ante optimality of repricing and rescission of executive stock options while considering dilution effects and the tax effects of new accounting rules associated with repricing and rescission. Traditional repricing lowers the exercise price of outstanding options to match the declined market value of the stock. Rescission allows employees to cancel already-exercised options when share prices fall, which was not an issue until 2000 when the stock market plummeted. To my best knowledge, this study is the first research on examining the possible optimality of traditional repricing and rescission while considering the economic impact of changing accounting rules in an ex-ante contracting setting. Chapter 2 examines the ex-ante optimality of repricing alternatives and derives an optimal repricing-triggered policy, which specify how deeply the options are under water before repricing takes place. In practice, traditional repricing practices have become obsolete since new accounting rules took effect in July 2000. To avoid associated variable accounting charges that cause uncertainty in future reported earnings, companies have tried several repricing alternatives as solutions to rescuing underwater options. This study not only justifies the occurrence of some repricing alternatives but also quantifies the impact of the marking-to-market feature imbedded in the new accounting rules.