The impact of mandated option expensing on CEO pay duration: evidence from FAS 123R

PurposePrior 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...

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Bibliographic Details
Published in:Managerial finance 2023-02, Vol.49 (3), p.555-576
Main Author: Welker, Adam
Format: Article
Language:English
Subjects:
Capital expenditures
Chief executive officers
Costs
Earnings per share
Equity
Executive compensation
Fair value
Incentives
Investments
R&D
Research & development
Stockholders
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Summary:PurposePrior 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/approachThis 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.FindingsThe 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/valueThe 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.
ISSN:0307-4358
1758-7743
DOI:10.1108/MF-06-2022-0260