Taking Stock: Investigating the Relationship Between Stock-Based Compensation and Share Price Performance in Public Software Companies

There has been considerable debate around the practice of compensating employees and executives using stock-based compensation (“SBC”). Studies point to a myriad of both benefits and drawbacks of SBC; while in practice, firms with high SBC intensity have harmed shareholders through share count dilution. One industry in particular has drawn sharp investor criticism for its SBC intensity: software. Despite the software sector’s growing importance to the economy and influence in the public markets, no academic literature has analyzed the impacts of SBC on software companies specifically. Filling the gap, investor literature has sought to examine this topic in the context of share price performance. One study by Gisz and Le (2023) asserts that technology companies with higher SBC intensity underperform because they have lower holding period returns. This paper tests the validity of Gisz and Le’s (2023) claim and highlights flaws in their methodology. Through the application of panel and time series multivariate multiple regressions, this paper finds that SBC intensity is not a statistically significant predictor of stock returns – measured on both a gross and abnormal monthly basis. However, the paper identifies a correlation between SBC and share price volatility, which was not previously accounted for by Gisz and Le (2023). These findings respond to prevailing investor sentiment around SBC intensity, demonstrate the nuances of assessing companies based on their SBC practices, and highlight the mechanical flaws of using individual firm holding period returns as is done by Gisz and Le (2023).