When Investors Look Away, Executives Reprice Options

The modern financial system rests on a simple premise: publicly traded companies can be owned by anyone with a brokerage account, and shareholders can elect directors and vote on major corporate matters, helping hold management accountable.

In practice, this is rarely that clear-cut. For one, many shareholders do not bother to use their voting rights, especially small retail investors, though sometimes institutional investors do not either. The issue is even more salient with the rise of passive investing, where shareholders own a company’s shares through ETFs and other intermediaries, and, in practice, companies like BlackRock (BLK ) generally exercise the voting rights.

This can be an issue, as a company’s management might be tempted to give itself generous compensation, potentially in a form that shareholders do not immediately recognize as excessive.

One such practice is option repricing, in which a company changes the terms of underwater employee stock options, often by lowering their exercise price or replacing them with new awards tied more closely to the current share price. In theory, this practice can help realign managerial incentives and reduce employee turnover. However, it can also encourage executives’ self-dealing at the expense of shareholders’ interests.

A new study by researchers at the Institute of Management Technology (India) and the Indian Institute of Management investigates this question. It found that some firms are timing their options repricing activity depending on temporary shifts in investor attention, suggesting that reduced institutional oversight can give executives more opportunity to pursue repricing decisions that favour their own interests.

They published their findings in International Review of Economics & Finance¹, under the title “Does investor attention affect employee stock options repricing activity?”.

Explaining Options Repricing

The repricing of employee stock options (ESOs) is any change in terms and conditions of already granted ESOs, usually done by a combination of changes:

• Lowering exercise prices.
• Canceling and regranting options with new exercise prices.
• Modifying option maturity.
• Replacing out-of-the-money stock options with stock or cash grants.

One key justification for option repricing is to maintain a motivating incentive for a company’s employees, especially at the higher management level.

For example, if a company’s stock declines too much, previously granted stock options can become deeply underwater, resulting in a steep decline in compensation. If the exercise price sits far above the current share price, the options may lose much of their practical incentive value because employees see little realistic prospect of benefiting from them.

At the same time, in the same example, too aggressive option repricing can let a management team that has been responsible for a severe stock price decline cash in all of their performance reward despite poor results.

Concerns about repricing contributed to tighter governance requirements. In 2003, the SEC approved changes to NYSE and Nasdaq listing standards requiring shareholder approval for most equity compensation plans and material revisions to them, including many option repricings. This gave shareholders greater authority over compensation decisions that could dilute their holdings or reward executives after poor performance.

Analyzing Shareholder Monitoring

Variable Investor Attention

Investors, especially institutional investors, should ideally be regarded as effective monitors in maintaining governance standards within a firm.

This can be achieved through a variety of actions:

• Refraining from cuts in R&D expenditure.
• Improving board of directors’ performance.
• Reducing firms’ propensity to engage in value-reducing acquisitions.
• Regulating executive opportunistic selling.

However, this attention can fluctuate over time, as institutional investors are distracted by other topics; for example, industry shocks or economy-wide factors.

So detecting if option repricing is more aggressively pursued during periods of higher distraction of institutional investors could indicate it is used to favor management’s interests first.

Collecting Option Repricing Data

The researchers examined 416 option-repricing events during the primary 1992–2002 study period using data from the Compustat ExecuComp database. This period allowed them to study repricing before shareholder-approval requirements substantially changed how companies could modify equity compensation.

To test whether the relationship persisted under the newer rules, they also manually collected 233 repricing events involving 226 US companies from SEC filings covering 2004–2011.

Investor distraction was measured using changes in institutional investors’ attention caused by unrelated shocks elsewhere in their portfolios. The researchers also used major news coverage as an alternative way to test whether periods of elevated market-wide distraction affected repricing activity.

Initial Data

The study found that repricing activity increased in 1996 and peaked around 1998, amid changes to the regulatory and accounting environment.

This concentration provides useful historical context, but does not by itself establish whether those repricing decisions benefited executives at shareholders’ expense.

The researchers also found that repricing is a more common practice in business services and software-related industries, with this sector making up almost half of all repricing activity (194 repricing events), while manufacturing, oil & gas, chemicals, and consumer goods only added up to 43 repricing events. This makes sense considering the IT sector’s tighter labor market and demand for a skilled labor force.

Option Repricings & Investor Distraction

The researchers found that when institutional shareholders temporarily reduce monitoring intensity, top executives are significantly more likely to reprice their stock options to maximize private benefits.

Among firms with deeply underwater options, a one-standard-deviation increase in investor distraction was associated with a 31.6% incremental increase in the conditional probability of repricing.

In addition, current and lagged quarterly returns are also negatively correlated with option repricing, and highly volatile firms are more likely to engage in stock option repricing activity.

Interestingly, firms’ age and options granted in prior years do not significantly impact their repricing probability.

To be sure it is not driven by period-specific activity, the researchers also analyze in isolation the data excluding Dot-Com firms from the sample. This analysis still found a positive association between investor distraction and stock options repricing activity.

When checking for managerial skills, they found that lower managerial ability correlates with more option repricing when investors are distracted. They also found that the presence of a majority of insiders in the compensation committee positively influences firms’ decisions to reprice their underwater options in a high-distraction quarter. This was especially true in the presence of a CEO who is also the chairman of the board.

Industry returns were also not correlated with option repricing, so they do not seem to be driving performance overall.

Altogether, these findings further seem to confirm that a significant portion of option repricing is done for management’s private benefits instead of shareholders’ interests.

Lastly, the researchers analyzed the effect of the 2003 shareholder-approval requirements. They found that these rules reduced executives’ ability to opportunistically time option repricing around periods of elevated investor distraction.

Investor Takeaways

While not always fraudulent, this study offers strong support for investors’ skepticism about option repricing.

This should be especially true during market or economic turmoil. During these periods, unscrupulous employees and management might use the temporary distraction to pass remuneration decisions that work to their advantage and to the detriment of shareholders.

This phenomenon is made more likely by other factors it correlates with, like combined CEO-chairman roles and insider-heavy compensation committees.

These conditions combined with option repricing should therefore be used as governance warning signs for existing and potential shareholders.

The study also illustrates the importance of regulation for such topics, as better disclosure has led to a significant drop in likely self-dealing option repricings.

Investing In Corporate Voting Technology

Broadridge Financial Solutions

As this study illustrates the issues that can emerge from poor oversight of companies’ management teams, it also highlights the importance of better tools to manage voting rights and improve shareholder participation.

Broadridge is a technology company focused on such financial tools, with its systems having facilitated voting for 544 billion shares during the 2025 proxy season, with 97% of voted shares submitted electronically. The company also provides blockchain-enabled proxy-voting infrastructure.

“Fixed income markets offer an excellent example of distributed ledger technology in action. The technology makes it easier to leverage smart contract technology, which can help digitize and mutualize workflows between counterparties, or execute corporate actions such as bond coupon payments and principal repayment.”

Horacio Barakat, Head of Digital Innovation for Capital Markets at Broadridge

It was initially established in 1962 as the brokerage services division of Automatic Data Processing (ADP ) (ADP), before being spun off in 2007.

The company is organized around 2 main segments:

• Investor Communication Solutions (ICS): spreading proxy materials and financial documents to shareholders, virtual shareholder meetings, and legal and regulatory communications.
• Global Technology and Operations (GTO): trade processing systems, wealth & asset management solutions, and business process outsourcing.

The company provides services to more than 10,000 corporate issuers, 30,000 mutual funds and ETFs, 200,000 financial advisors, 150,000 institutional shareholders and 200 million retail shareholder accounts.

Its broader operations include approximately $1.5 trillion managed on Broadridge Investment Management platforms, seven billion regulatory and customer communications processed annually, and 2,500 virtual shareholder meetings held each year.

In fiscal 2025, Broadridge generated approximately $6.9 billion in total revenue, including $4.5 billion in recurring revenue. Over the ten years ending in fiscal 2025, recurring revenue grew at a compound annual rate of 10%, while adjusted earnings per share grew at 13%.

Source: Broadridge

A key driver of Broadridge’s growth has been the need for more automation in voting and management of investor relations communication, as well as increasingly decentralized or complex share ownership.

Broadridge does not prevent questionable option repricing, but its infrastructure can reduce the practical friction involved in distributing proxy information, processing votes and enabling shareholders to participate in corporate governance.

Latest Broadridge Financial Solutions (BR) Stock News and Developments

Study Referenced

^{1. Abhinav Sharma and Ajay Pandey. Does investor attention affect employee stock options repricing activity? International Review of Economics & Finance. October 2026. Article: 105728. Volume 111. 10.1016/j.iref.2026.105728}