Mary Ellen Carter
University of Pennsylvania
Luann J. Lynch
University of Virginia
Abstract: We examine whether repricing stock options reduces both executive and overall employee turnover using a sample of firms that reprice underwater stock options in 1998 and a control sample of firms with underwater stock options that choose not to reprice. We find little evidence that repricing underwater stock options affects executive turnover. However, using forfeited stock options to proxy for overall employee turnover, we find evidence that overall employee turnover decreases significantly in repricing firms in 1999, while turnover for nonrepricing firms does not change. In the multivariate analysis, we find a negative relation between our proxy for overall employee turnover in 1999 and repricing, suggesting that repricing helps to prevent employees from leaving because of underwater options. Despite the competitive labor markets in which high technology firms may operate and their heavier use of stock options, we find no evidence that the relation between turnover and repricing differs between high technology and nonhigh technology firms. Overall, our results provide little support for firmsÂ’ arguments for repricing executive stock options. However, since we find that repricing is negatively related to overall employee turnover, repricing nonexecutive stock options may enhance firmsÂ’ abilities to retain those employees.
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