Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R*

52 Pages Posted: 30 Sep 2005 Last revised: 22 Feb 2012

See all articles by Mohan Venkatachalam

Mohan Venkatachalam

Duke University - Fuqua School of Business

Shivaram Rajgopal

Columbia Business School

Preeti Choudhary

University of Arizona, Eller College of Management

Date Written: September 9, 2008

Abstract

In December 2004, the Financial Accounting Standards Board (FASB) mandated the use of a fair value based measurement attribute to value employee stock options (ESOs) via FAS 123-R. In anticipation of FAS 123-R, between March 2004 and November 2005, several firms accelerated the vesting of ESOs to avoid recognizing existing unvested ESO grants at fair value in future financial statements. We find that the likelihood of accelerated vesting is higher if (i) acceleration has a greater effect on future ESO compensation expense, especially related to underwater options; and (ii) firms suffer greater agency problems, proxied by fewer block-holders, lower pension fund ownership and top five officers holding a greater share of ESOs. We also find a negative stock price reaction around the announcement of the acceleration decision, especially for firms with greater agency problems. Furthermore, stock returns are significantly negative before the new vesting dates and positive afterward, suggesting that vesting dates could have been backdated.

Keywords: accelerated vesting, employee stock options, transaction structuring, FAS 123-R, FAS 123, recognition, disclosure

JEL Classification: M41

Suggested Citation

Venkatachalam, Mohan and Rajgopal, Shivaram and Choudhary, Preeti, Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R* (September 9, 2008). ; Forthcoming in Journal of Accounting Research. Available at SSRN: https://ssrn.com/abstract=813287 or http://dx.doi.org/10.2139/ssrn.813287

Mohan Venkatachalam (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Preeti Choudhary

University of Arizona, Eller College of Management ( email )

Department of History
Tucson, AZ 85721
United States

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