Charity begins at the office: issuing cheap stock and stock options to employees and insiders before going public

IF 1.9 Q2 BUSINESS, FINANCE Managerial Finance Pub Date : 2024-09-16 DOI:10.1108/mf-09-2023-0540
John D. Finnerty
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引用次数: 0

Abstract

Purpose

Press reports have indicated that firms frequently underprice restricted stock and employee stock options. I test for underpricing of stock and options.

Design/methodology/approach

I examined a sample of 5,333 private firm stock and option issuances between 1985 and 2017. I tested for underpricing using two approaches: assuming investors have no special market-timing ability and assuming instead they have perfect market-timing ability.

Findings

I find evidence of widespread stock and option underpricing by private firms before they go public reflecting large discounts that exceed reasonable compensation for lack of marketability. Unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded, but the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect. Underpricing is still detected even when the actual DLOMs are tested against a benchmark that assumes investors have perfect market-timing ability.

Research limitations/implications

Firms frequently underprice restricted stock and employee stock options. Firms tend to underprice stock options more frequently than restricted stock, but restricted stock tends to be priced at deeper discounts when recipients are assumed not to have any special market-timing ability.

Practical implications

Private firms issue restricted stock and options as incentive compensation. Lowballing the valuation transfers wealth from outside stockholders to employees/insiders. Wealth transfers take place through the issuance of equity claims to employees/insiders before firms go public. I found that more than a quarter of the DLOMs exceed the theoretical maximum by, on average, between 16% (median) and 20% (mean). This finding raises two questions worthy of investigation. First, to what extent do the frequency and magnitude of DLOMs above the theoretical maximum depend on whether a board of directors obtains an independent appraisal of a stock’s fair market value? Second, if DLOMs above the theoretical maximum are observed even when the stock is independently appraised, how do appraisers justify such large DLOMs?

Social implications

The wealth transfers that take place through the issuance of equity claims to employees/insiders before firms go public benefit employees/insiders at the expense of outside shareholders.

Originality/value

My paper is the first to furnish evidence of widespread stock and option underpricing by private firms before they go public; demonstrate that the unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded and show that the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect.

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慈善从办公室开始:上市前向员工和内部人员发行廉价股票和股票期权
目的新闻报道指出,公司经常对限制性股票和员工股票期权定价过低。我对 1985 年至 2017 年间发行的 5333 份私营公司股票和期权进行了抽样调查。我采用两种方法对定价不足进行了检验:假设投资者没有特殊的市场时机把握能力,以及假设投资者具有完美的市场时机把握能力。研究结果我发现了私营企业在上市前普遍存在股票和期权定价不足的证据,反映出其缺乏市场性所带来的大幅折扣超过了合理的补偿。在上市前的最后一次私募股权交易中,未报告的定价偏低现象更为常见,因为这是在股票公开交易前给予此类折扣的最后一次机会,但在上市前的早期交易中,折扣幅度更大,而在这些交易中,未报告的折扣可能更难被美国证券交易委员会发现。即使将实际的 DLOM 与假定投资者具有完美的市场时机把握能力的基准进行对比测试,仍会发现定价过低的情况。与限制性股票相比,公司更倾向于低估股票期权的价格,但当假定接受者不具备任何特殊的市场时机把握能力时,限制性股票的价格往往会有更大的折扣。压低估值会将财富从外部股东转移到员工/内部人手中。财富转移是在企业上市前通过向员工/内部人士发行股票实现的。我发现,超过四分之一的 DLOM 超过理论最大值,平均超出 16%(中位数)至 20%(平均数)。这一发现提出了两个值得研究的问题。首先,超过理论最大值的 DLOM 的频率和规模在多大程度上取决于董事会是否对股票的公平市场价值进行了独立评估?其次,如果即使对股票进行了独立评估,也能观察到高于理论最大值的 DLOM,那么评估师如何证明如此大的 DLOM 是合理的?社会影响公司上市前通过向员工/内部人发行股票债权而发生的财富转移有利于员工/内部人,但却牺牲了外部股东的利益。原创性/价值 本文首次提供证据证明私募公司在上市前普遍存在股票和期权定价过低的现象;证明未报告的定价过低现象在首次公开发行前的最后一次私募股权交易中更为频繁,因为这些交易提供了在股票公开交易前给予此类折扣的最后机会;还证明在首次公开发行前的早期交易中,折扣幅度更大,因为在这些交易中,未报告的折扣可能更难被美国证券交易委员会发现。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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来源期刊
Managerial Finance
Managerial Finance BUSINESS, FINANCE-
CiteScore
3.30
自引率
12.50%
发文量
103
期刊介绍: Managerial Finance provides an international forum for the publication of high quality and topical research in the area of finance, such as corporate finance, financial management, financial markets and institutions, international finance, banking, insurance and risk management, real estate and financial education. Theoretical and empirical research is welcome as well as cross-disciplinary work, such as papers investigating the relationship of finance with other sectors.
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