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Stock option grant vesting terms: economic and financial reporting determinants

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  • Brian D. Cadman

    (University of Utah)

  • Tjomme O. Rusticus

    (Northwestern University)

  • Jayanthi Sunder

    (University of Arizona)

Abstract

Option grant vesting terms are a contractual provision that is shaped by accounting standards and other economic factors. We examine the effect of accounting standards, specifically SFAS 123(R), on the vesting terms of stock option grants while also modeling other economic determinants of this contract feature. We document significant variation in stock option grant vesting periods and patterns suggesting that firms actively choose vesting terms. Consistent with financial reporting incentives influencing contract design, we find that firms simultaneously lengthen vesting periods and alter vesting patterns after the adoption of SFAS 123(R). The changes in vesting patterns are consistent with firms trying to defer recognition of the option expense, while limiting the incremental risk imposed on the CEO. In addition, we find that vesting schedules are longer in growth firms where lengthening the executive’s investment horizon is more important and that firms with more powerful CEOs and weaker governance grant options with shorter vesting periods.

Suggested Citation

  • Brian D. Cadman & Tjomme O. Rusticus & Jayanthi Sunder, 2013. "Stock option grant vesting terms: economic and financial reporting determinants," Review of Accounting Studies, Springer, vol. 18(4), pages 1159-1190, December.
    • Handle: RePEc:spr:reaccs:v:18:y:2013:i:4:d:10.1007_s11142-012-9215-6
    DOI: 10.1007/s11142-012-9215-6
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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