Investor Sentiment and Stock Option Vesting Terms

• In Event: SESSION 7D: Executive Compensation

Abstract

This paper investigates how investor sentiment affects executive compensation contracts. Using the details of vesting terms for stock option grants, we find that managers strongly prefer stock options with shorter vesting period/duration in high sentiment periods relative to low sentiment periods. Further, stock options granted in high sentiment periods are more likely to be completely vested (or have a significantly larger fraction vested) within one year of the grant date relative to low sentiment periods. Also, we find that higher institutional ownership and/or greater analyst coverage attenuate the impact of investor sentiment on stock option vesting terms. Taken together, our evidence is consistent with the contention that higher investor sentiment exposes managers’ wealth to greater stock price volatility. As a result, managers prefer stock options with short vesting terms to reduce their exposure to high investor sentiment.

Authors

• Shawn X. Huang, Arizona State University

• Sami Keskek, University of Arkansas-Fayetteville

• Juan Manuel Sanchez, Texas Tech University