The Stock Price Reactions to the Repricing of Employee Stock Options

Download or read book The Stock Price Reactions to the Repricing of Employee Stock Options written by Barbara M. Grein and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study whether employee stock option repricings are in the best interests of shareholders by investigating the excess stock returns associated with timely, non-contaminated announcements of repricings by Canadian firms. We develop four theories of why firms reprice employee stock options, and test the competing predictions the theories make regarding the mean announcement-date excess stock return, and the cross-sectional relations between announcement-date excess returns and candidate economic factors. For 57 non-contaminated repricing announcements over the period November 1994-July 2001, we document a significantly positive three-day mean announcement-date excess return of 6.6%. Combined with the results of cross-sectional regressions, we conclude that the market incorporates the probability of repricing into its pre-repricing assessment of firm value, and responds favorably to announcements of repricings for reasons of incentive realignment and employee retention. The market does not react as though managers use repricings to extract rents from shareholders, nor does the act of repricing appear to systematically reveal favorable private information about the firm.