Investor Sentiment and Stock Option Vesting Terms

54 Pages Posted: 10 May 2015

See all articles by Shawn X. Huang

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Sami Keskek

Florida State University

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: May 8, 2015

Abstract

Using the details of vesting terms, we document that stock options granted in high sentiment periods tend to have shorter vesting period/duration, and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date relative to low sentiment periods. Further, we show that the sentiment effect on vesting terms is more pronounced among managers whose newly granted compensation comprises primarily stock options, and less pronounced for firms with strong monitoring mechanisms (i.e., more independent boards and higher institutional ownership). In addition, we explore the cross-sectional variation in sentiment-driven mispricing, and find that greater analyst coverage attenuates the impact of investor sentiment on vesting terms. Finally, we find that firms providing short vesting schedules during high sentiment periods indeed have significantly lower stock returns in the post-vesting period. Taken together, our evidence suggests that managers recognize prevailing sentiment, and demand stock options with short vesting terms to take advantage of mispriced stock prices and reduce the exposure of their wealth to the risk imposed by sentiment-driven mispricing.

Keywords: Investor Sentiment, Sentiment, Executive Compensation, Vesting Schedules, Vesting Terms, Stock Options

JEL Classification: G14, G30, J33, J41, M10, M52

Suggested Citation

Huang, Shawn X. and Keskek, Sami and Sanchez, Juan Manuel, Investor Sentiment and Stock Option Vesting Terms (May 8, 2015). Available at SSRN: https://ssrn.com/abstract=2604328 or http://dx.doi.org/10.2139/ssrn.2604328

Shawn X. Huang (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Sami Keskek

Florida State University ( email )

Department of Accounting
College of Business
Tallahassee, FL 32306
United States

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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