Managerial incentives and executive stock option repricing: A study of US casino executives

The practice of executive stock option repricing is examined using a sample of firms in the gaming industry during 1994-98. The practice of repricing executive stock options is often criticized, however this paper recognizes that there may be conditions when such recontracting may be viewed as beneficial to shareholders. Specifically, given that options provide both incentives to increase risk as well as stock price, firms must be cognizant that executives may increasingly face incentives to invest in risky, negative NPV projects, as options go underwater. This paper shows repriced executives exhibit greater incentives to increase risk relative to their nonrepriced counterparts. This effect is apparent in both univariate and multivariate analyses. Additionally, repricing is negatively related to changes in the relative ratio of risk-taking vs. valueincreasing incentives. This result suggests that repricing assists firms in alleviating excessive risktaking incentives of senior management. JEL classification: G13, G34, J33, L83