Managerial Risk‐Taking Incentives and Executive Stock Option Repricing: A Study of US Casino Executives

Daniel A. Rogers

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Corporate Finance and Governance Stochastic processes and financial applications Risk Management in Financial Firms

Abstract

I examine the relation between managerial incentives from holdings of company stock and options and stock option repricing. Because options provide incentives to increase both risk and stock price, firms must realize that as options go underwater, executives might face incentives to invest in risky, negative NPV projects. Repricing may alleviate such incentives. I examine repricing activity by firms in the US gaming industry and find that risk‐taking incentives from options are positively related to the incidence of executive option repricing. The results support the hypothesis that repricing assists firms in alleviating excessive risk‐taking incentives of senior management.

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1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973The Pricing of Options and Corporate Liabilities 1985The Determinants of Firms' Hedging Policies 2002Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility 2002Managerial Power and Rent Extraction in the Design of Executive Compensation 1999The sensitivity of CEO wealth to equity risk: an analysis of the magnitude and determinants 2002Stock options for undiversified executives 2002Do Firms Hedge in Response to Tax Incentives?

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2007How employee stock options and executive equity ownership affect long-term IPO operating performance 2015CEO Risk‐Taking Incentives and the Cost of Equity Capital 2013The Effect of Executive Stock Options on Corporate Innovative Activities 2009Stock Option Repricing and Its Alternatives: An Empirical Examination

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