Abstract
The main purpose of this paper is to extend the model of Acharya et al. (J Financ Econ 57:65–101, 2000) to examine the ex-ante optimality of repricing of executive stock options while considering dilution effects and the tax effects of new accounting rules associated with repricing. Although there has been a body of empirical literature on repricing, the optimality of repricing after considering the economic impact of changing accounting rules has not been addressed in an ex-ante contracting setting. We find that traditional repricing loses its ex-ante dominance over the do-nothing strategy after we incorporate the tax effects of new accounting rules. The theoretical predictions of our paper shed light on this controversial practice and lay a foundation for evaluating repricing alternatives.
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