The Valuation Differences Between Stock Option and Restricted Stock Grants for US Firms

Abstract

In this study, we document a significant shift over the past several years from stock option-based compensation to restricted stock-based compensation. Additionally, we evaluate whether stock option grants and restricted stock grants result in similar valuation consequences for firms. We estimate cross-sectional valuation equations that include the value of stock option and restricted stock grants summed over the current and past two years, residual income, and book value of equity, after controlling for endogeneity. Consistent with prior research, our findings indicate that the market on average values stock option grants positively. However, in contrast to stock option grants, restricted stock grants are valued negatively. This result is consistent with restricted stock grants lacking the positive incentive effects of stock options and being viewed as a liability or expense to the firm.

Goodwill Impairment Losses and CEO Compensation

“…When goodwill is found to be impaired, compensation committees appear to restructure compensation to reduce the risk-taking incentives. Our results are consistent with the notion that option compensation is more efficient in inducing CEOs to take the optimal level of risky investments (Bryan et al, 2000) and the market differentiates the incentive effects of option and restricted stock grants (Irving, Landsman, & Lindsey, 2011). Thus, restructuring of CEO compensation is implemented mainly through reducing option compensation rather than restricted stock.…”

Goodwill Impairment Losses and CEO Compensation

“…When goodwill is found to be impaired, compensation committees appear to restructure compensation to reduce the risk-taking incentives. Our results are consistent with the notion that option compensation is more efficient in inducing CEOs to take the optimal level of risky investments (Bryan et al, 2000) and the market differentiates the incentive effects of option and restricted stock grants (Irving, Landsman, & Lindsey, 2011). Thus, restructuring of CEO compensation is implemented mainly through reducing option compensation rather than restricted stock.…”

CEO Centrality and Meeting or Beating Analysts’ Earnings Forecasts

“…30 29 Veenman et al (2011) argue that the actual exercise of options (as opposed to simply the level of option holding) is a stronger signal of managerial opportunism. 30 Irving et al (2011) note that there is a significant shift from stock option-based compensation to restricted stock-based compensation in US firms. All proxies of equity incentives are extracted from Execucomp database and deflated by total outstanding shares of the firm.…”

“…30 30 Irving et al (2011) note that there is a significant shift from stock option‐based compensation to restricted stock‐based compensation in US firms. All proxies of equity incentives are extracted from Execucomp database and deflated by total outstanding shares of the firm. …”