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

Abstract

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.