Employee Stock Options (ESOPs) and Restricted Stock: Valuation Effects and Consequences

52 Pages Posted: 14 Nov 2005  

Aswath Damodaran

New York University - Stern School of Business

Date Written: September 30, 2005

Abstract

In the last decade, firms have increasingly turned to offering employees options and restricted stock (often with restrictions on trading) as part of compensation packages. Some of this trend can be attributed to the entry of young, cash poor technology firms into the market, many of which have to use equity because they have no choice. However, many larger market cap firms that can afford to pay cash compensation have used stock based compensation as a way of aligning managerial interests with stockholder interests. In this paper, we begin by looking at motives, good and bad, for using equity based compensation, and trends over the last few years. We then turn to the accounting rules, old and new, that govern how equity compensation is recorded and reported. Finally, we consider how best to incorporate employee options and restricted stock - both past and prospective - into discounted cash flow and relative valuation models.

Keywords: employee stock options, ESOP, restricted stock, management options

JEL Classification: G12, G24, G34

Suggested Citation

Damodaran, Aswath, Employee Stock Options (ESOPs) and Restricted Stock: Valuation Effects and Consequences (September 30, 2005). Available at SSRN: https://ssrn.com/abstract=841504 or http://dx.doi.org/10.2139/ssrn.841504

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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