Proxy advisory firms and stock option repricing ☆
Authors: David F. Larcker, Stanford Graduate School of Business, Rock Center for Corporate Governance, Stanford University, 655 Knight Way, Stanford, CA 94305-7298, USA, Allan L. McCall, Stanford Graduate School of Business, Stanford University, USA Gaizka Ormazabal, IESE Business School, University of Navarra, Spain
Publication Date: November-December 2013
Journal: Journal of Accounting and Economics, Volume 56, Issues 2–3, November–December 2013, Pages 149–169
•Proxy advisory firms provide voting recommendations to institutional investors and mutual funds.
•The value of a repricing is lower when it complies with the evaluation policies of ISS and Glass Lewis.
•Voting recommendations of proxy advisory firms are not value increasing for shareholders.
This paper examines the economic consequences associated with the board of director’s choice of whether to adhere to proxy advisory firm policies in the design of stock option repricing programs. Proxy advisors provide research and voting recommendations to institutional investors on issues subject to a shareholder vote. Since many institutional investors follow the recommendations of proxy advisors in their voting, proxy advisor policies are an important consideration for corporate boards in the development of programs that require shareholder approval such as stock option repricing programs. Using a comprehensive sample of stock option repricings announced between 2004 and 2009, we find that repricing firms following the restrictive policies of proxy advisors exhibit statistically lower market reactions to the repricing, loweroperating performance, and higher employee turnover. These results are consistent with the conclusion that proxy advisory firm recommendations regarding stock option repricings are not value increasing for shareholders.