Executive Option Repricing, Incentives, and Retention


  • Mark A. Chen

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    • Mark A. Chen is with the University of Maryland. I appreciate the comments and suggestions of Brian Hall, Jonathan Karpoff, Rafael La Porta, Gordon Phillips, N. R. Prabhala, Andrei Shleifer, and seminar participants at Harvard University, Southern Methodist University, the University of Illinois at Urbana-Champaign, the University of Maryland, and the 2001 Financial Management Association meetings. I also thank an anonymous referee and Rick Green (the editor) for helpful comments that substantially improved the paper. Any remaining errors are my own.


While many firms grant executive stock options that can be repriced, other firms systematically restrict or prohibit repricing. This article investigates the determinants of firms' repricing policies and the consequences of such policies for executive turnover and retention. Firms that have better internal governance, that use more powerful stock-based incentives, or that face less shareholder scrutiny are more likely to maintain repricing flexibility. Firms that restrict repricing are more vulnerable to voluntary executive turnover following stock price declines. When share price declines are severe, restricting firms appear to award unusually large numbers of new options.