Stock Option Grant Vesting Terms: Economic and Financial Reporting Determinants

Review of Accounting Studies, Forthcoming

50 Pages Posted: 1 Feb 2010 Last revised: 20 Nov 2012

Brian D. Cadman

University of Utah - David Eccles School of Business

Tjomme O. Rusticus

University of Minnesota

Jayanthi Sunder

University of Arizona - Eller College of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2012

Abstract

Option grant vesting terms are a contractual provision that is shaped by accounting standards and other economic factors. We examine the effect of accounting standards, specifically SFAS 123(R), on the vesting terms of stock option grants while also modeling other economic determinants of this contract feature. We document significant variation in stock option grant vesting periods and patterns suggesting that firms actively choose vesting terms. Consistent with financial reporting incentives influencing contract design, we find that firms simultaneously lengthen vesting periods and alter vesting patterns after the adoption of SFAS 123(R). The changes in vesting patterns are consistent with firms trying to defer recognition of the option expense, while limiting the incremental risk imposed on the CEO. In addition, we find that vesting schedules are longer in growth firms where lengthening the executive’s investment horizon is more important and that firms with more powerful CEOs and weaker governance grant options with shorter vesting periods.

Keywords: Executive Compensation, Stock Option Vesting Periods, Effects of SFAS 123(R)

JEL Classification: G30, J33, M41, M42

Suggested Citation

Cadman, Brian D. and Rusticus, Tjomme O. and Sunder, Jayanthi, Stock Option Grant Vesting Terms: Economic and Financial Reporting Determinants (July 1, 2012). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1545602 or http://dx.doi.org/10.2139/ssrn.1545602

Brian D. Cadman

University of Utah - David Eccles School of Business ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States
801-585-9517 (Phone)

HOME PAGE: http://www.business.utah.edu/bio/briancadman

Tjomme O. Rusticus (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South, Room 3-122
Minneapolis, MN 55455
United States

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-626-8489 (Phone)

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