A Dual Role for Restricted Stock Grants

Abstract

Restricted stock grants are generally modeled as an alternative incentive creation device to stock option grants. Given that incentive option grants are not dividend-protected while restricted stock grants carry dividend entitlements, we propose a dual role for restricted stock when granted simultaneously with options. We find that CEOs of dividend-paying stocks who are incentivized by option grants are effectively protected against dividend risk by simultaneous grants of restricted stock. We further show that the hedge rationale empirically dominates a delta maintenance rationale that follows when firms seek to maintain the option delta for the option term. Our evidence has major implications for all models and empirical analyses that assume restricted stock grants operate purely as incentive devices.