The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting

The Review of Financial Studies (Forthcoming)

71 Pages Posted: 22 May 2015 Last revised: 9 Feb 2018

See all articles by Torsten Jochem

Torsten Jochem

University of Amsterdam

Tomislav Ladika

University of Amsterdam

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Date Written: October 1, 2017

Abstract

We document that firms can effectively retain executives by granting deferred equity pay. We show this by analyzing a unique regulatory change (FAS 123-R) that prompted 723 firms to suddenly eliminate stock option vesting periods. This allowed CEOs to keep 33% more options when departing the firm, and we find that voluntary CEO departure rates subsequently rose from 5% to 21%. Our identification strategy exploits FAS 123-R's almost-random timing, which was staggered by firms' fiscal year-ends. Firms that experienced departures suffered negative stock price reactions, and responded by increasing compensation for remaining and newly hired executives.

Keywords: Executive retention, Unvested equity, Stock options, Accelerated option vesting, FAS 123-R

JEL Classification: G34, J33, M12, M52

Suggested Citation

Jochem, Torsten and Ladika, Tomislav and Sautner, Zacharias, The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting (October 1, 2017). The Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2608555 or http://dx.doi.org/10.2139/ssrn.2608555

Torsten Jochem (Contact Author)

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

Tomislav Ladika

University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands
020-5255501 (Phone)

HOME PAGE: http://www1.fee.uva.nl/pp/tladika/

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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