Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R

Posted: 20 Oct 2008

See all articles by Preeti Choudhary

Preeti Choudhary

University of Arizona, Eller College of Management

Shivaram Rajgopal

Columbia Business School

Mohan Venkatachalam

Duke University - Fuqua School of Business

Abstract

In December 2004, the Financial Accounting Standards Board (FASB) mandated the use of a fair value based measurement attribute to value employee stock options (ESOs) via FAS 123-R. In anticipation of FAS 123-R, between March 2004 and November 2005, several firms accelerated the vesting of ESOs to avoid recognizing existing unvested ESO grants at fair value in future financial statements. We find that the likelihood of accelerated vesting is higher if (i) acceleration has a greater effect on future ESO compensation expense, especially related to underwater options; and (ii) firms suffer greater agency problems, proxied by fewer block-holders, lower pension fund ownership and top five officers holding a greater share of ESOs. We also find a negative stock price reaction around the announcement of the acceleration decision, especially for firms with greater agency problems. Furthermore, stock returns are significantly negative before the new vesting dates and positive afterward, suggesting that vesting dates could have been backdated.

Keywords: accelerated vesting, stock options, earnings management, backdating

JEL Classification: G12, G34, M41, M44, J33

Suggested Citation

Choudhary, Preeti and Rajgopal, Shivaram and Venkatachalam, Mohan, Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R. Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1286154

Preeti Choudhary

University of Arizona, Eller College of Management ( email )

School of Accountancy
Tucson, AZ 85721
United States

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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