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Stock and Option Grants with Performance-based Vesting Provisions

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  • Carr Bettis
  • John Bizjak
  • Jeffrey Coles
  • Swaminathan Kalpathy

Abstract

We assemble a sample of 983 equity-based awards that include either an accelerated- or a contingent-vesting provision tied to firm performance and explore the frequency, contractual nature, usage, and implications of such awards. We find that performance-vesting (p-v) provisions specify meaningful performance hurdles and provide significant incentives for executives. The propensity to use p-v provisions is positively related to the arrival of a new CEO and the proportion of outsiders on the board of directors and negatively related to prior stock performance. Performance-vesting firms have significantly better subsequent operating performance than control firms. Abnormal accounting performance does not arise from earnings management or discernible differences in financial or investment policy. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 23 (2010)
Issue (Month): 10 (October)
Pages: 3849-3888

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Handle: RePEc:oup:rfinst:v:23:y:2010:i:10:p:3849-3888

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Cited by:
  1. Kini, Omesh & Williams, Ryan, 2012. "Tournament incentives, firm risk, and corporate policies," Journal of Financial Economics, Elsevier, vol. 103(2), pages 350-376.
  2. Alex Edmans & Vivian W. Fang & Katharina A. Lewellen, 2013. "Equity Vesting and Managerial Myopia," NBER Working Papers 19407, National Bureau of Economic Research, Inc.
  3. Yuliy Sannikov & Xavier Gabaix & Tomasz Sadzik & Alex Edmans, 2010. "Dynamic Incentive Accounts," 2010 Meeting Papers 1207, Society for Economic Dynamics.
  4. Cronqvist, Henrik & Fahlenbrach, RĂ¼diger, 2013. "CEO contract design: How do strong principals do it?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 659-674.
  5. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," CESifo Working Paper Series 3277, CESifo Group Munich.
  6. Larcker, David F. & McCall, Allan L. & Ormazabal, Gaizka, 2012. "The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies," Research Papers 2105, Stanford University, Graduate School of Business.

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