| The two essays of my dissertation focus on "six-and-one" option exchange, a mechanism in which employee stock options are canceled and reissued, typically after six months and one day. In the first essay, I investigate the incentive effects, retention effects, wealth effects, and market reaction associated with such option exchanges. Employing a multinomial logit specification to investigate the likelihood of incentive alignment choices that include the six-and-one option exchange, repricing, grant of stock options, and grant of restricted stock, I find evidence that firms conduct six-and-one option exchanges and repricings to retain employees and realign the incentives of managers to take risks. Stock market reaction to the six-and-one option exchange is positive and significant. Cross-sectional results indicate that the market responds positively to the retention motives of firms conducting six-and-one option exchanges. Bond market reaction is also positive and significant. The evidence is consistent with the notion that the bond market anticipates a reduction in managerial risk-taking after the announcement of a stock option exchange. Results indicate that the stock return variance decreases in the year following the announcement of the stock option exchange.; In the second essay, I investigate analyst and investor behavior and market pricing in a setting where the managerial incentive to manipulate earnings and market price should be apparent ex ante to market participants. I find evidence of abnormally low accruals following announcements of six-and-one option exchanges up to the time that the options are subsequently reissued. Nevertheless, analysts and investors are not misled. Over the nine months prior and six months following the reissue date, abnormal accruals do not explain stock price performance. Moreover, the coefficient on the abnormal accruals estimated at the earnings announcement is insignificantly different from zero. Finally, abnormal accruals do not explain subsequent analyst forecast errors. Thus, my findings suggest that, in this transparent setting, analysts and investors are not misled by managerial attempts to manipulate stock price by managing discretionary accruals. |
