Accelerating Vesting of Employee Stock Options to Avoid Expense Recognition

Abstract

This study examines firms accelerating the vesting of stock options prior to FAS 123(R) becoming effective. A central tenet of this research is that the firms electing to accelerate do so to take advantage of the opportunity to get option expenses written off in a one-time footnote disclosure. They thereby avoid income statement option-expense recognition from these options. The evidence does not support the positive benefits from acceleration claimed by its proponents. Rather, this decision is consistent with management acting in its self interest by reducing the impact of their option-based compensation on reported income and simultaneously making their options potentially more valuable.

Keywords: Acceleration, Vesting, Emplyee Stock Options, Managemnt Compensation, FAS 123R

JEL Classification: M41, M43, G34, J33