Altering the terms of executive stock options

We examine the practice of resetting the terms of previously-issued executi ve stock options. We identify properties of reset options, develop a model for valuing resettable options, and characterize the firms that have reset options. We find the vast majority of options are reset at-the-money, resul ting, on average, in the strike price dropping 40%, Our valuation model sug gests that resetting has only a small impact on the ex-ante value of an opt ion award, but the ex-post gain can be substantial. Finally, we find resett ing has a strong negative relation with firm performance even after correct ing for industry performance. (C) 2000 Elsevier Science S.A. All rights res erved. JEL classification: G12; G13; G32.