The Economics of Restricted Stock and the Section 83(B) Election

Abstract

As restricted stock is increasingly important in compensation packages, understanding its unique institutional features becomes paramount. We study the interplay between tax and incentive attributes to show how management appears to be utilizing a unique tax election to generate firm benefits. Interestingly, theoretical models predict a firm’s indifference to an employee’s acceleration of income recognition of restricted stock grants (i.e., make an I.R.C. Section 83(b) election). However, our empirical evidence shows otherwise. Our comparison of a sample of firms that restrict the election to a sample of firms that does not confirms that firms prohibit the election to minimize taxes whereas they require the election for incentive purposes.