Stock and Option Grants with Performance-based Vesting Provisions

Carr Bettis; John M. Bizjak; Jeffrey L. Coles; Swaminathan L. Kalpathy

doi:10.1093/rfs/hhq060

Stock and Option Grants with Performance-based Vesting Provisions

Carr Bettis^1,2,3; John M. Bizjak⁴; Jeffrey L. Coles^2,3; Swaminathan L. Kalpathy⁵

¹ Gradient (United States) · ² Verus Research (United States) · ³ Arizona State University · ⁴ Texas Christian University · ⁵ Southern Methodist University

Review of Financial Studies 2010

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.

DOI: 10.1093/rfs/hhq060
Volume: 23 (10)
Pages: 3849-3888
Language: en
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