Share-based Compensation and Firm Value

Abstract

There is little agreement on how to incorporate share-based compensation into firm valuation. This is not surprising given the complexity of both the accounting for share-based compensation and its disclosure on financial statements. A review of Court opinions indicates a wide range of inputs of how, and even whether, share based compensation should be captured in the determination of firm value. We show that expected free cash flow used to value an enterprise should capture the impact of share-based compensation. We also provide an appropriate method to determine per share value that includes outstanding share-based compensation instruments.