The Value of Vesting Restrictions on Managerial Stock and Option Holdings

Abstract

Firm value and operating performance are positively related to managerial incentives from both vested and unvested stock and option holdings. The effects of incentives on firm value and operating performance are significantly larger for unvested stock and options than for vested ones, however, and the effects increase in the length of the vesting period. We find corroborating evidence of the effects of vesting restrictions on firm value using an event study of corporate acquisition announcements. Collectively, the results imply that the potential benefits of incentive contracts with longer vesting periods outweigh their potential costs and imply that vesting restrictions are an important dimension of incentive contracts.

Keywords: executive compensation, CEO pay, vesting restrictions, contracts

JEL Classification: G12, J33, G34