Stock option grant vesting terms: Economic and financial reporting determinants

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

Research output: Contribution to journalArticlepeer-review

31 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1159-1190
Number of pages32
JournalReview of Accounting Studies
Issue number4
StatePublished - Dec 2013


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

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)


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