The impact of mandated option expensing on CEO pay duration: evidence from FAS 123R
ISSN: 0307-4358
Article publication date: 30 September 2022
Issue publication date: 24 February 2023
Abstract
Purpose
Prior studies show that accounting considerations related to executive compensation impact managerial incentives, which in turn can impact real investment. These studies, however, largely omit the role of one key incentive: the duration of executive compensation. This study addresses this gap by examining the impact of accounting costs on duration. The findings have important implications not only for the determinants of duration but also the potential role duration plays in incentivizing corporate investment.
Design/methodology/approach
This study exploits a plausibly exogenous increase in the accounting cost of option compensation under accounting rule FAS 123R to determine the impact of accounting considerations on managerial incentives and particularly the duration of executive compensation. Heterogeneity in firm-level exposure to the rule is exploited under a difference-in-difference framework. The sample comprises S&P 500 firms for the years 2002–2008.
Findings
The analysis shows that under FAS 123R, which increased the accounting cost of option compensation, duration is impacted more for affected firms than are delta and vega, two other key incentives highlighted in the literature. While duration, delta and vega are all highly intertwined making disentangling the individual impact of each incentive difficult, cross-sectional evidence suggests changes in research and development (R&D) spending are more likely attributable to changes in duration rather than vega or delta.
Originality/value
The evidence in this study shows how accounting considerations shape managerial incentives, particularly duration, and provides new insights into the relationship between duration and R&D spending.
Keywords
Acknowledgements
This paper is based on a part of the author’s dissertation at Penn State University. The author is grateful to Laura Field and Matthew Gustafson for many helpful discussions. The author also thanks John Bizjak, David Haushalter, Peter Iliev, Jason Kotter, Karl Muller, Fenghua Song and seminar and conference participants at Colorado State University, Muhlenberg College, Penn State University, Texas Tech University, the University of Nevada – Reno, Utah Valley University, the Multinational Finance Society 2019 Winter Conference, the Eastern Finance Association 2019 Annual Meeting, the FMA 2019 Global Conference in Latin America and the FMA 2019 Annual Meeting for helpful comments and suggestions. All errors are the author’s.
Citation
Welker, A. (2023), "The impact of mandated option expensing on CEO pay duration: evidence from FAS 123R", Managerial Finance, Vol. 49 No. 3, pp. 555-576. https://doi.org/10.1108/MF-06-2022-0260
Publisher
:Emerald Publishing Limited
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