Option Grant Vesting Periods: Determinants and Consequences

Abstract:     
This paper investigates the determinants and consequences of stock option grant vesting periods for CEOs. Observing vesting periods by compiling a data set of Form 4 insider trading files that match with firms reported grants, we document significant variation in the vesting periods of option grants. We then test economic motivations for vesting terms based on executive retention, rent extraction and governance, equity as compensation, risk-taking incentives, and horizon incentives as potential determinants of vesting periods. We find evidence that vesting periods are increasing in firms desire to retain the executive, the quality of corporate governance, monitoring by active institutions, and the opportunity cost of myopic behavior. At the same time, we find that vesting periods are decreasing in measures indicating that firms grant options as current compensation. We also find that the accounting treatment of stock options influences vesting periods in a sample of firms that voluntarily expense their stock options. This study provides evidence that vesting terms are an important component of executive compensation schemes.

Keywords: Stock Options, Executive Compenstaion, SFAS 123(R), Governance

JEL Classifications: G24, J33, G34, J41, M52

Working Paper Series