Cheap Stock Options: Antecedents and Outcomes

52 Pages Posted: 20 Apr 2022 Last revised: 21 May 2024

See all articles by Brad A. Badertscher

Brad A. Badertscher

University of Notre Dame

Bjorn Jorgensen

Copenhagen Business School

Sharon P. Katz


Jeremy Michels

Purdue University

Date Written: May 16, 2024


We examine the prevalence, determinants, and consequences of cheap stock. Practitioners have adopted the label “cheap stock” to refer to equity-based compensation granted before a firm’s IPO that uses a share price below the IPO price. Cheap stock grants have drawn regulators’ attention, with the SEC frequently commenting on issues related to cheap stock when reviewing firms’ IPO registration statements. We find that the average firm’s IPO price is more than five times the exercise price of options issued in the fiscal year before the IPO. This divergence between the IPO price and the exercise price of recently granted options is greater for firms that grant more options, have larger public offerings, and have venture capital backing. Finally, cheap stock options are associated with greater IPO underpricing, lower post-IPO investment, and higher CEO compensation. Collectively, our results illustrate the extent of cheap stock option grants and how these grants influence firms’ post-IPO behavior.

Keywords: Initial public offering, IPO, cheap stock, stock options, earnings management, executive compensation, financial reporting quality

JEL Classification: G14, G24, M12, M13, M40, M41

Suggested Citation

Badertscher, Brad A. and jorgensen, bjorn and Katz, Sharon P. and Michels, Jeremy, Cheap Stock Options: Antecedents and Outcomes (May 16, 2024). INSEAD Working Paper No. 2022/35/ACC, Available at SSRN: or

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Bjorn Jorgensen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000

Sharon P. Katz

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305

Jeremy Michels (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

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