Stock Option Repricing: Heads I Win, Tails You Lose

Recent scandals at Enron, WorldCom and Global Crossing have put the ethical spotlight on corporate malfeasance as never before. However, these are the situations in which management knew that they made the wrong choice. As professor Joseph Badaracco of Harvard Business School points out, the real ethical dilemmas arise when people must choose between right and right — where both choices can be justified, yet one must be chosen over the other. Whether or not to reprice stock options represents one such ethical dilemma. Repricing can help exodus of talented employees and motivate them to improve firm performance. However, it alienates shareholders and other workers of the company who are left unprotected from the adverse economic consequences of a stock price decline.In this paper we examine the ethics and the economics of stock option repricing. We find that repricing runs counter to two key tenets of business ethics — distributive justice and ordinary decency. To examine the economics of repricing, we draw upon agency theory to identify situations where repricing has the potential to benefit shareholders. However, a survey of empirical research reveals that these benefits do not translate into reality. Repricing does not improve employee retention or firm performance. In addition, managers benefit by opportunistically timing the repricing. Due to weaknesses in corporate governance such as lack of independence and conflicts of interest, the current repricing practice seems to be at odds with the objective of shareholder wealth maximization, and at a more fundamental level, a violation of board's fiduciary duty to shareholders. We offer suggestions that mitigate the ethically undesirable effects of repricing in the wider context of prevailing corporate governance and regulatory environment. We believe that these suggestions, if properly implemented, can transform repricing from a greed-inspired evil to a valuable compensation tool to retain employees, boost their morale, and enhance stockholder wealth.     

Options pricing and short-selling in the underlying: Evidence from India

This study provides new insights into certain recent developments in derivatives trading in India. Specifically, it examines the implications of introduction of short-selling for pricing efficiency of the Nifty 50 index derivative contracts of National Stock Exchange of India. The empirical results suggest that the introduction of short-selling, supported by a well-functioning security lending and borrowing market, has significantly reduced the overpricing of Nifty 50 index put options. Moreover, the introduction of this short-selling mechanism has lessened the underpricing of Nifty 50 index futures.     

Too Small to Regulate

The paper argues that to achieve compliance of firms with regulations such as product quality or environmental or health standards it is better to have industries with a few large corporations than numerous small firms. We construct a model to show that limited liability constraints bind more easily in competitive industries, making it harder to impose sufficiently severe penalties and costlier to send sufficient monitors. Having large corporations allows the government effectively to delegate some of its monitoring functions to the managers of the corporation. The tradeoff between this issue and the usual argument in favor of competition is considered.

     

The impact of prior stock market reactions on risk taking in acquisitions

We study the relationship between the stock market's reaction to a prior acquisition and the risk associated with a subsequent acquisition. Using a sample of 823 acquisitions over the period 1990–2006 we find that acquirers buy increasingly volatile targets both as the abnormal dollar gains from the previous acquisition announcement increase, and as the abnormal dollar losses increase (i.e. a V shaped relationship). Our findings are consistent with psychological theories of decision making and risk seeking, including prospect theory and the house money effect. In addition, they highlight that the stock market reaction to the prior acquisition announcement acts as an important reference point in acquisition decisions. Copyright © 2014 John Wiley & Sons, Ltd.     

A Markup Interpretation of Optimal Investment Rules

We re-examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.     

中国新一代务实型消费者

中国消费者的行为方式正与发达国家的消费者越来越相像。与过去相比，他们变得越来越挑剔，也越来越实际，他们的视野更加开阔，超越了对产品功能的基本关注。此外，他们越来越愿意为更高的产品价值和质量而花钱，并且花费更多时间研究产品，以及探究产品之间的细微差别。     

What makes strategy making across the sales-marketing interface more successful?

Extant research on marketing strategy making (MSM) lacks process-based theoretical frameworks that elucidate how marketing strategies are made when sales and marketing functions are involved in the process. Using a grounded theory approach and data collected from (a) 58 depth interviews with sales and marketing professionals and (b) a focus group with 11 marketing professionals, we propose that MSM within the sales-marketing interface is a three-stage, multifaceted process that consists of Groundwork, Transfer and Follow-up stages. Our process-based model explicates the specific activities at each stage that are needed to develop and execute marketing strategies successfully, the sequence in which these activities may unfold, and the role sales and marketing functions may play in the entire process. Managerially, this paper highlights that successful strategy creation and execution requires marketing and sales functions to be equally invested in the entire process.     

Heterogeneity in male and female farmers’ preference for a profit-enhancing and labor-saving technology: The case of Direct-Seeded Rice (DSR) in India

Labor-saving and income-increasing technologies may affect women farmers differently from men. However, very few studies explicitly account for women's preferences for new technologies. We carried out a discrete choice experiment with 337 female and 329 male farmers in Maharashtra, India, to measure their willingness to pay (WTP) for direct-seeded rice (DSR) with drum seeder and to understand the gender differences in marginal valuations of key attributes. We used the Women's Empowerment in Agriculture Index (WEAI) to collect self-reported data on the role and say of women in different domains of decision making. The respective gender roles of women and men in the family and on the farm are aligned with their preferences. Men have a greater say over how the family spends the cash. Accordingly, men tend to have a higher WTP for attributes that increase income (increase in yield) or reduce cash costs (reduction in seed rate). Women contribute a large share of the labor for transplanting rice, much of which is unpaid work on family farms. Women, therefore, seem to value labor saving more. Women in our sample were more interested in the new technology and had a higher WTP for it.     

Ad-Hoc Black–Scholes vis-à-vis TSRV-based Black–Scholes: Evidence from Indian Options Market

This research paper examines one-day-ahead out-of-sample performance of the volatility smirk-based options pricing models, namely, Ad-Hoc-Black–Scholes (AHBS) models on the CNX Nifty index options of India. Further, we compare the performance of these models with that of a TSRV-based Black–Scholes (BS) model. For the purpose, the study uses tick-by-tick data. The results on the AHBS models are highly satisfactory and robust across all the subgroups considered in the study. Notably, a daily constant implied volatility based ad-hoc approach outperforms the TSRV-based BS model substantially. The performance of the ad-hoc approaches improves further when the smile/smirk effect is considered. For the estimation of the implied volatility smile, we apply three weighting schemes based on the Vega and liquidity of the options. All the schemes offer equally competing results. The major contribution of the study to the existing literature on options pricing is in terms of the ex-ante examination of the ad-hoc approaches to price the options by calibrating volatility smile/smirk on a daily basis.