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.
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Acknowledgments We thank the Accounting Research Center at the Kellogg School of Management for financial support. Brian Cadman also thanks the David Eccles School at the University of Utah for
financial support, and Jayanthi Sunder similarly thanks the Eller School of Management at the University of Arizona. We gratefully acknowledge helpful comments from Richard Sloan (editor) and anonymous reviewers. We also thank Ian Gow, Fabrizio Ferri, Thomas Lys, Beverly Walther, and workshop participants at the DUKE/UNC Fall Camp, the New York University Summer Camp, the FARS conference, the Massachusetts Institute of Technology, Purdue University, the University of Arizona, the University of Houston, the University of Illinois at Chicago, the University of Iowa, the University of Michigan, the University of Pennsylvania, the University of Texas A&M, and the University of Utah for helpful comments.
- Effects of SFAS 123(R)
- Executive compensation
- Stock option vesting periods