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This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention.

The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event.

It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years.

Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good.

Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.