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
Terms of Use & License Information
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.
Recommended Citation
Lai, Riley, "Unlocking Value or Signaling Trouble? Exploring the Determinants of Immediate Market Reactions to Underwater Employee Option Exchanges" (2025). CMC Senior Theses. 3806.
https://scholarship.claremont.edu/cmc_theses/3806