Review of Accounting Studies

, Volume 18, Issue 4, pp 1159–1190 | Cite as

Stock option grant vesting terms: economic and financial reporting determinants

  • Brian D. Cadman
  • Tjomme O. Rusticus
  • Jayanthi Sunder


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.


Executive compensation Stock option vesting periods Effects of SFAS 123(R) 

JEL Classification

G30 J33 M41 M42 


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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Brian D. Cadman
    • 1
  • Tjomme O. Rusticus
    • 2
  • Jayanthi Sunder
    • 3
  1. 1.David Eccles School of BusinessUniversity of UtahSalt Lake CityUSA
  2. 2.Kellogg School of ManagementNorthwestern UniversityEvanstonUSA
  3. 3.Eller School of ManagementUniversity of ArizonaTucsonUSA

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