What is Six and One? An Analysis of Re-Priced Stock Options
29 Pages Posted: 19 Sep 2004
Date Written: September 15, 2004
Abstract
This paper examines the incentives surrounding re-priced options and the favorable timing of option awards. To avoid expense recognition of re-priced options, some firms set a replacement strike price six months plus one day after the cancellation of existing options. The six-plus-one strategy makes the grant date completely predictable. Abnormal stock returns are negative (positive) during the six-month period prior to the replacement date for grants that include (exclude) officers or directors. Positive abnormal returns occur after the replacement date for firms covered by a smaller number of analysts and for grants that exclude officers and directors. Earnings surprises and volatility reflect efforts to produce the favorable abnormal return pattern.
Keywords: stock options, repricing, earnings management
JEL Classification: M52
Suggested Citation: Suggested Citation
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