The Impact of FAS 123R on Employee Retention

ABSTRACT

Building on evidence that firms grant employee stock options (ESOs) in order to retain employees, we assess the impact of Financial Accounting Standard (FAS) 123R, and the reduction in ESO use that followed its adoption, on employee retention at the metropolitan statistical area (MSA) level. We assess two primary measures of employee turnover at the MSA level: the number of quarterly separated employees (overall separations) and the number of quarterly separated employees that find new employment within the same or adjacent quarter of separation (voluntary separations). Using a difference‐in‐differences design, we find relatively greater post–FAS 123R employee turnover in (1) MSAs with lower noncompete enforceability levels and (2) MSAs from states with greater R&D expenditure and no inevitable disclosure doctrine (IDD) laws, where IDD laws potentially deter employees from working for a competing firm. Our results suggest that the adoption of FAS 123R had a negative impact on firms' ability to retain employees in jurisdictions where employers had an ex ante incentive to compensate their employees with ESOs for retention purposes. We further show that these effects are amplified in financially constrained regions and are driven by employee reallocation to sectors unaffected by the regulation.