Stock option grant vesting terms: economic and financial reporting determinants

Stock option grant vesting terms: economic and financial reporting determinants Option grant vesting terms are a contractual provision that is shaped by accounting standards and other economic factors. We examine the effect of accounting standards, specifically SFAS 123(R), on the vesting terms of stock option grants while also modeling other economic determinants of this contract feature. We document significant variation in stock option grant vesting periods and patterns suggesting that firms actively choose vesting terms. Consistent with financial reporting incentives influencing contract design, we find that firms simultaneously lengthen vesting periods and alter vesting patterns after the adoption of SFAS 123(R). The changes in vesting patterns are consistent with firms trying to defer recognition of the option expense, while limiting the incremental risk imposed on the CEO. In addition, we find that vesting schedules are longer in growth firms where lengthening the executive’s investment horizon is more important and that firms with more powerful CEOs and weaker governance grant options with shorter vesting periods. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Stock option grant vesting terms: economic and financial reporting determinants

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Publisher
Springer Journals
Copyright
Copyright © 2012 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-012-9215-6
Publisher site
See Article on Publisher Site

Abstract

Option grant vesting terms are a contractual provision that is shaped by accounting standards and other economic factors. We examine the effect of accounting standards, specifically SFAS 123(R), on the vesting terms of stock option grants while also modeling other economic determinants of this contract feature. We document significant variation in stock option grant vesting periods and patterns suggesting that firms actively choose vesting terms. Consistent with financial reporting incentives influencing contract design, we find that firms simultaneously lengthen vesting periods and alter vesting patterns after the adoption of SFAS 123(R). The changes in vesting patterns are consistent with firms trying to defer recognition of the option expense, while limiting the incremental risk imposed on the CEO. In addition, we find that vesting schedules are longer in growth firms where lengthening the executive’s investment horizon is more important and that firms with more powerful CEOs and weaker governance grant options with shorter vesting periods.

Journal

Review of Accounting StudiesSpringer Journals

Published: Nov 16, 2012

References

  • Do firms understate stock option-based compensation expense disclosed under SFAS 123?
    Aboody, D; Barth, M; Kasznik, R
  • The effect of equity compensation on voluntary executive turnover
    Balsam, S; Miharjo, S
  • Relative valuation roles of equity book value and net income as a function of financial health
    Barth, M; Beaver, W; Landsman, W
  • The CEO pay slice
    Bebchuk, LA; Cremers, M; Peyer, U

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