Add author to existing arXiv paper? I had a student write an excellent Master's thesis which is not publishable as novel research but which I think would serve as a great introduction to the topic. Although the student is happy to have it posted to the arXiv, more needs to be done to connect the thesis to the existing literature. The student has graduated and is busy, I'd like to make the necessary adjustments myself, but I don't want to take credit for the bulk of the thesis which is the student's work.

Is it possible to upload an initial version (the original) to the arXiv with just the student's name, followed later by an updated version with me added as 2nd author? Will the arXiv correctly show that the first version was just the work of the student? 

Also, are there are ethical issues I should be aware of? Assume that the student has been given the opportunity to make the changes themself, has declined, and endorses the above plan.
I have just checked that changing authors when replacing a paper is technically enabled. I am pretty sure I have seen this happen: those with more searching savvy than I will surely turn up with actual examples.  And yes, the arxiv maintains all previous postings and their authorship.

I don't see any ethical problems with what you propose.  But I'm not sure I understand the message that you're seeking to convey: are you saying that you attach some meaning to an initial posting by your student only followed by a replacement jointly authored with you?  To me that does not have a clear meaning (and by the way, some people will look at the first posting and many won't).  If anything, that would look to me like you realized that what your student uploaded was not satisfactory, so you stepped in to salvage the situation.  If that's not what you're going for, maybe don't do this.  Why not just upload a jointly authored posting the first time around?