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Revisiting Rescission of Executive Stock Options: Theory and Empirical Evidence

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  • Jerry T. Yang

    (Department of Finance, National United University Miaoli, Taiwan, R.O.C.)

Abstract

We justify the occurrence of rescission by examining the ex-ante optimality of rescission of executive stock options while considering the associated accounting rules in response to this controversial practice. Rescission may be the least favorable practice from shareholders’ ex-post viewpoint but we find that shareholders will be almost always better off in terms of expected initial payoffs under rescission than under do-nothing policy. Our empirical data show that rescission is followed by a 34.66% drop in stock return and the cumulative abnormal returns of the sample firms nearly fall to −50% on the rescission date. Simulation results show that the subjective value-added to executives for pre-committed rescission feature on ESOs is 14% while the estimated agency cost under rescission is twice as much as that under do-nothing policy. These empirical evidences and analytical predictions provide a more comprehensive and in-depth understanding of rescission, which help shed some light on devising option-based incentive contracts with variable terms.

Suggested Citation

  • Jerry T. Yang, 2024. "Revisiting Rescission of Executive Stock Options: Theory and Empirical Evidence," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 27(04), pages 1-43, December.
    • Handle: RePEc:wsi:rpbfmp:v:27:y:2024:i:04:n:s0219091524500255
    DOI: 10.1142/S0219091524500255
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    More about this item

    Keywords

    rescission; executive stock options; subjective value; agency cost; incentive contracts;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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