Six-month-one-day employee stock option repricing: An examination of accounting considerations and incentive implications

This dissertation investigates repricing activities after the FASB imposed an accounting charge for repriced options. I document significant economic ramifications in option repricing after the change of accounting treatment. I find that traditional repricing almost disappeared. Instead, many firms implemented 6&1 repricing (i.e., re-issuing new options in about six-months-plus-one-day after canceling old underwater options) to circumvent the accounting charge associated with repricing. Compared to firms that continuously use traditional repricing over the same period, 6&1 repricing firms show higher growth potential, have more analysts following, and expect higher accounting charges associated with stock price increases had they implemented traditional repricing. These results provide evidence that managers are concerned with lower reported earnings despite there being no cash flow impacts and the concerns are stronger in those firms that face greater capital market pressure to deliver earnings.; This dissertation also investigates whether managers behave opportunistically to maximize the value of their option awards under the 6&1 repricing setting where the option award date is fixed and known to managers ex ante. More specifically, I examine whether managers influence the exercise price of their option awards by accelerating bad news before and delaying good news after the option awards. As a contrast with anecdotal speculation and prior findings, I do not find evidence consistent with opportunistic disclosure in those 6&1 repricing firms.