Grein, Hand, and Klassen (2005) studied the stock price reaction to repricing of ESOs. They examined a sample of 72 Canadian companies that repriced ESOs during the years 1994– 2001. They found a 4.9% average positive abnormal share price reaction for their sample firms over a narrow window of three days surrounding the repricing announcement. Furthermore, the lower the stock market return on the firm’s shares for the six- month period leading up to the repricing (and thus the greater the fall in value of employee ESOs), the more positive the stock market’s reaction to the repricing.
They also found that the probability a firm would reprice its ESOs was greater when the CEO and the Board chair were the same person (their proxy for poor corporate governance).

Required
a. Explain reasons why firms may reprice their ESOs. Use efficient contracting and agency theory concepts in your answer where appropriate.
b. Which of the reasons you identified is most likely to predict the researchers’ finding that share prices for their sample firms increased on average following ESO repricing? Does this finding support efficient securities market theory? Explain.