Altering the terms of executive stock options

We examine the practice of resetting the terms of previously-issued executive 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, resulting, on average, in the strike price dropping 40%. Our valuation model suggests that resetting has only a small impact on the ex-ante value of an option award, but the ex-post gain can be substantial. Finally, we find resetting has a strong negative relation with firm performance even after correcting for industry performance.