Revisiting Rescission of Executive Stock Options: Theory and Empirical Evidence

Jerry T. Yang
Additional contact information
Jerry T. Yang: Department of Finance, National United University Miaoli, Taiwan, R.O.C.

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2024, vol. 27, issue 04, 1-43

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.

Keywords: rescission; executive stock options; subjective value; agency cost; incentive contracts (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 G38 J33 L14 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219091524500255
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:rpbfmp:v:27:y:2024:i:04:n:s0219091524500255

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219091524500255

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().