Investor Sentiment and Stock Option Vesting Terms

Abstract

Using the details of vesting terms, we document that stock options granted in high investor sentiment periods tend to have shorter vesting periods and durations, 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. We further find that the sentiment effect on vesting terms is more pronounced when firms are largely held by investors with short investment horizons (e.g., transient institutions). Moreover, short vesting terms in high sentiment periods are positively associated with future M&A activity and capital expenditures. Overall, our findings are consistent with theoretical predictions that, in a speculative market, shareholders incentivize managers with short-term oriented compensation contracts to induce managers to pursue actions maintaining overvaluation.

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

JEL Classification: E44, G12, G14, G19, G30, J33, M12, M52