Restricted Stock is on the Rise: What Does this Mean for Whistleblowing?

The use of restricted stock compensation to supplement or to give a bonus to executives is on the rise. What happens when things go wrong? Research finds that those in private companies are less likely to whistleblow than those in public companies overall. Literature also reveals that restricted stock may positively influence whistleblowing when large financial rewards are present. Further, vesting period and strike price influence whistleblowing for those with stock option compensation. Yet, little is investigated regarding whistleblowing related to the vesting period of the restricted stock and the type of organization -public or private- granting this compensation. We find that for those in public companies, whistleblowing tends to increase as the vesting period of the stock compensation is farther in the future. Those in private companies have the opposite behavior. Agency theory focused within whistleblowing theory helps resolve this seeming juxtaposition. Implications for practice and policy are offered.

A Current View of the Restricted Stock Studies and Restricted Stock Discounts

Although there is relevant evidence in some restricted stock studies that can be helpful for marketability discount determinations, comparisons with average discount observations from these studies do not provide a meaningful methodology to estimate marketability discounts. We conclude this despite the fact that too many valuation analysts continue to rely on simplistic comparisons with averages of restricted stock discounts from dated studies in their marketability discount determinations.

Informational efficiency and governance in restricted share settings: boosting family business leaders' financing decisions

PurposeVolume-based liquidity ratios suffer from potential measurement bias due to share restriction and may misrepresent actual liquidity. To address this issue, the authors develop two modified metrics, the free-float liquidity and the alternative free-float illiquidity ratios. These measures are well suited to estimate liquidity in the presence of trading constraints, as can be found in closely held/state-owned entities, IPOs/SEOs with lockup restrictions, dual-class share structures and family-owned businesses.Design/methodology/approachThe authors modify the turnover illiquidity ratio, where the number of outstanding shares is scaled by the public free float, and use natural log transformation to normalize free-float liquidity. Our dataset is composed of daily observations for US stocks included in the S&P 500 index over the 2015–2018 period. To test the validity of free-float (il)liquidity ratios, the authors perform a correlation analysis for various liquidity metrics. To examine their empirical efficiency, the authors employ pooled OLS regression models for family firms as a subsample of liquidity-constrained entities, relying on five different identifiers of family-owned businesses.FindingsThe authors’ empirical testing indicates that the proposed free-float (il)liquidity ratios compare favorably with other volume-based methods, such as Amihud's ratio, liquidity ratio and turnover ratio. For the subsample of family organizations as a restricted-share setting, the authors report significant coefficients for our free-float measures across all the family firm identifiers used. In particular, as free-float decreases with progressive family influence, the advanced ratios capture an increase (decrease) in perceived liquidity (illiquidity) that is absent in the other benchmarks.Originality/valueThis study allows the authors to inform the ongoing debate on the management and governance of publicly listed companies with various impediments to trade. Traditional measures understate illiquidity (overstate liquidity) as the fraction of free trading shares is limited by design or circumstances. The authors’ proposed free-float metrics offer informational gains for family leaders to aid in their financing decisions and for non-family outsiders to guide their investment choice. As a constrained free float inhibits price discovery processes, the authors discuss how restricted stock issuers may alleviate the attendant negative effects on governance and information opacity.

Unpacking the dynamics of a contested practice: the case of executive compensation and the shareholder value orientation in the USA

The corporate scandals and market crashes of the 2000s generated significant criticism of the shareholder value orientation (SVO) in the USA. We offer a sociopolitical analysis of how this criticism triggered changes in stock-based executive compensation, a central practice associated with the SVO. We first analyze how corporate stakeholders redefined different forms of stock-based compensation, motivated new regulations and wielded direct challenges to specific firms. We then predict how firm-specific differences in external challenges and intra-firm power relationships were related to changes in the use of stock options and restricted stock grants (RSGs), testing our predictions using a longitudinal dataset of S&P 500 executives between 2002 and 2012. We find that firms facing negative media coverage of their executive compensation practices made less use of both forms of stock-based compensation, while firms facing shareholder activism only made less use of stock options, the form that was more heavily criticized. In addition, firms with more powerful CEOs utilized RSGs more heavily and did so even when facing media criticism. Our findings demonstrate that while stock options were vulnerable to change, stock-based compensation remained resilient because the structural power of CEOs, a core corporate governance feature of the SVO, also remained resilient.

CEO compensation, portfolio holdings and strategic investments

Purpose The purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas. Design/methodology/approach The authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016. Findings The authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D. Originality/value Little earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.