Aboody, Johnson, and Kasznik (AJK; 2010) examined a sample of 1364 firms over the years 1990– 1996 that suffered a decrease in share price of 30% or more. Of these firms, 300 repriced their ESOs. They found that the earnings and cash flows of the repricing firms significantly exceeded, on average, those of the firms that did not reprice for up to five years after repricing. They also found that this improved operating performance was concentrated in firms with the greatest economic incentives to reprice. In addition, improved operating performance was concentrated in firms that repriced only for executives. Firms that extended repricing to all employees did not exhibit any additional improvement in performance.

Required
a. Why did operating performance of repricing firms for up to five years after repricing exceed that of non- repricing firms?
b. AJK found that improved operating performance was concentrated in firms with the greatest economic incentives to reprice. Suggest some of these economic incentives.
c. Suggest reasons why AJK found no additional operating performance improvement when repricing was extended beyond executives to all employees.