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Jon Einar Flatnes `05 received third place in the Term Paper Contest for his paper entitled "Stock Option Pricing and Executive Turnover" at the 2005 annual conference of the Minnesota Economic Association held recently at the University of St. Thomas in St. Paul, MN.


With the increasing importance of stock options as a component of executive compensation , it is important to understand their effectiveness in aligning executive interests with those of shareholders and their function as a retention device. With the collapse of the tech stock bubble in the past three years, compensation committees of an increasing number of firms have repriced previously granted stock options downward. While many authors argue that downward repricing is essential to intentivize executives and to retain valuable managers, repricing also creates a potential disincentive to performance by granting the executive a potential windfall while the stock price plummets. Previous studies have been focusing on the underlying factors that determine the repricing decision, and less research has been addressing the consequences from this board action . This paper examines the effect of stock option repricing on executive turnover. Do firms that choose to reprice experience a relatively lower turnover rate among its top executives when compared to firms faced with circumstances in which repricing might be chosen, but chose not to? This paper is divided into six sections. Section 2 discusses the theoretical background and the existing literature on the topic. Section 3 outlines the conceptual model and discusses the ideal data. Section 4 describes the actual data, and develops the actual model. Section 5 shows the regression results and discusses the findings, and section 6 concludes.



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