MaryEllen Carter
University of Pennsylvania
Luann J. Lynch
University of Virginia
Abstract: We examine firms choices of repricing stock options through traditional repricings or six and one option exchanges. Six and one exchanges involve agency issues not present in traditional repricings because participants stand to gain more if the stock price falls during the six-month and one day window between the cancellation of old options and the issuance of replacement options. Thus, participants may undertake actions that cause stock price declines prior to the regrant of replacement options. As such, we expect that firms with poor governance are more likely to choose six and one exchanges relative to a traditional repricings, after considering the income statement effects associated with these decisions. Using a sample of 168 six and one exchanges and 115 traditional repricings, we find, surprisingly, that firms with poor governance are more likely to choose a traditional repricing. Consistent with prior research, we find that firms that are less likely to care about the charge to earnings are more likely to choose a traditional repricing. Examining further the agency issues surrounding six and one exchanges, we find limited evidence that employees are taking actions to cause stock price declines during this period.
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