Stock-based Compensation, Financial Analysts, and Equity Overvaluation

Stock-based compensation (SBC) is a significant and growing expense for many firms. From fiscal year 2006 to 2018, average SBC has increased steadily from 2.6 percent to 3.8 percent of operating expenses for publicly-traded companies. Despite its importance, however, most firms exclude SBC expense in their non-GAAP earnings, and anecdotal evidence suggests that few analysts consider the expense associated with options in their valuation models. In a recent paper, we investigate whether SBC leads to overvaluation in equity markets and the role played by analysts in the relationship between SBC and valuation.

Ignoring SBC is likely to lead to overvaluation, … Read more