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

18 Pages Posted: 11 May 2011

See all articles by James H. Irving

James H. Irving

James Madison University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Bradley P. Lindsey

Utah State University - Huntsman School of Business

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Date Written: April 1, 2011

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.

Keywords: stock compensation, stock options, restricted stock, valuation

Suggested Citation

Irving, James H. and Landsman, Wayne R. and Lindsey, Bradley P., The Valuation Differences between Stock Option and Restricted Stock Grants for US Firms (April 1, 2011). Journal of Business Finance & Accounting, Vol. 38, Nos. 3/4, pp. 395-412, 2011, Available at SSRN: https://ssrn.com/abstract=1838043 or http://dx.doi.org/10.1111/j.1468-5957.2011.02235.x

James H. Irving (Contact Author)

James Madison University

United States

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Bradley P. Lindsey

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
(435) 797-4126 (Phone)

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