Option Acceleration in Response to SFAS 123(R)
35 Pages Posted: 17 Aug 2007
Date Written: June 2007
As of February 28, 2006, 958 publicly held companies accelerated the vesting of some or all of their employee stock options in advance of adopting SFAS 123 (R). We examine both the market reaction to these accelerations, as well as the determinants of the decision. Investors, in general, react positively to acceleration announcements as we find an average abnormal return of about one-half of one percent, with the reaction positively associated with the expense reduction that resulted from the acceleration, the declaration by the firm that the options accelerated are out of the money, return on assets, and firm size. Additionally, we find that the decision to accelerate is positively associated with our estimate of the future expense related to unvested options, i.e., the expense avoided because of the acceleration. In contrast, the intrinsic value of unvested options, i.e., the expense that would have to be recognized at the time of acceleration, firm profitability and firm size (i.e., political visibility) are negatively associated with the decision to accelerate.
JEL Classification: J33, G12, M41, M44
Suggested Citation: Suggested Citation