On Rescissions in Executive Stock Options

Rangarajan K. Sundaram
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Rangarajan K. Sundaram: Stern School of Business, New York University

The Journal of Business, 2005, vol. 78, issue 5, 1809-1836

Abstract: In recents years, some executives have been permitted by firms to rescind stock option exercise decisions by returning the stock to the company for a refund of the exercise price. Such rescissions have been widely condemned as weakening incentives. We find that rescissions often deliver the same incentive payoffs as a standard option but at a lower cost. The cost savings arise as a consequence of the tax treatment of the exercise/rescission decisions under U.S. tax law. The savings are associated positively with stock volatility and the personal/corporate tax rate spread and negatively with interest rates.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:1809-1836

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