Researcher ORCID Identifier

https://orcid.org/0009-0007-0321-1136

Graduation Year

2025

Date of Submission

12-2024

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Reader 1

Lisa K. Meulbroek

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2024 Riley Lai

Abstract

Whether employee option exchanges are an effective process to ensure a firm’s future outlook is vital for companies to consider. Evaluating the impact of these exchanges on firm value and shareholder wealth can provide insights for companies to align employee incentives with shareholder interests. This paper seeks to determine a definitive correlation between employee option exchange announcements and positive or negative abnormal returns over the announcement window. The focus is on the regulatory environment post-Section 409A, a provision in the Internal Revenue Code that prohibits the issuance of in-the-money employee stock options. This paper fills a significant gap in the literature on employee option exchanges and shareholder wealth, as this analysis has not been completed on data post-Section 409A. While there is no indication that employee option exchange programs universally trigger abnormal firm returns, the presence of certain characteristics in option exchanges results in statistically significant negative abnormal returns over the event period. Specifically, this study finds that the eligibility of management in the exchange, and the presence of rumors prior to the official exchange announcement produce negative abnormal returns over the event window.

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