Option repricing, management turnover and restatement

Abstract

This study examines the association between financial restatements and executive option repricings and tests whether stock option repricing reduces management turnover in restating firms. We found a positive association between financial restatement and management turnover and those financial restating firms are likely to implement option repricing when the manager’s equity compensation is large and the sensitivity of the option value is high. However, we found no evidence that executive option repricing reduces management turnover in financial restating firms. Our analysis showed that, although financial restating firms may implement option repricing to restore the option incentive effect, valuable managers often leave their jobs because of poor future prospects in restating firms. Our results, therefore, suggest that repricing of executive stock options is not an effective management retention strategy for financial restating firms but managers’ equity compensation and option value incentives are important determinants of option repricing.