Option Expensing and Managerial Equity Incentives

47 Pages Posted: 18 Jun 2009

See all articles by Yi Feng

Yi Feng

Ryerson University - Ted Rogers School of Management

Yisong S. Tian

York University - Schulich School of Business


We examine the impact of mandatory option expensing on managerial equity incentives. Though effective only after June 15, 2005, there is evidence that U.S. firms begin preparing for option expensing as early as 2002 by making changes to their equity incentive plans. We find that (1) CEO option incentives exhibit a sharp reversal during the period 1993-2005, with the median CEO option incentives increasing 25% a year before 2002 but declining 17% a year after 2001; (2) the reduction in option incentives after 2001 is larger for firms that use excessive levels of equity incentives prior to 2002; (3) firms make similar reductions to options granted to CEOs, other top executives and lower-level employees; (4) CEO stock incentives increase throughout the entire 13-year period, rising at an even greater rate after 2001; and (5) the increase in stock incentives after 2001 is far from offsetting the corresponding decrease in option incentives. These findings are robust to controls for firm and CEO characteristics and for concurrent regulatory, business and market events such as the Sarbanes-Oxley Act of 2002, the option backdating scandal, and the 2000 stock market crash. We also provide a theoretical explanation for the documented changes in option incentives.

Suggested Citation

Feng, Yi and Tian, Yisong Sam, Option Expensing and Managerial Equity Incentives. Financial Markets, Institutions & Instruments, Vol. 18, Issue 3, pp. 195-241, August 2009. Available at SSRN: https://ssrn.com/abstract=1422166 or http://dx.doi.org/10.1111/j.1468-0416.2009.00148.x

Yi Feng

Ryerson University - Ted Rogers School of Management ( email )

350 Victoria Street
Toronto, Ontario M5B 2K3
416-979-5000 ext. 6755 (Phone)

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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