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An International Meeting of American Accounting
Association
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Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R |
Preeti Choudhary
Duke University
Mohan Venkatachalam
Duke University
Shiva Rajgopal
University oOf Washington
Abstract: The Financial Accounting Standards Board (FASB) recently mandated the expensing of the fair value of 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 a fair value based ESO expense in future financial statements. We find that the likelihood of accelerated vesting is higher if (i) firms can save more of 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.