Overhang

What is 'Overhang'

Overhang is a measure of the potential dilution to which a common stock's existing shareholders are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the company. It is usually represented in percentage form and is calculated as stock options granted, plus the remaining options that have yet to be granted divided by the total shares outstanding.

BREAKING DOWN 'Overhang'

There is no precise rule-of-thumb for determining what level of options overhang is bad for investors but, generally speaking, the higher the number, the greater the risk. If a company has a very high options overhang, it must generate even higher levels of growth in order to provide decent returns to investors net of the overhang's dilutive effects on investor returns.

RELATED TERMS
  1. Market Overhang

    An observational theory stating that in certain stocks at certain ...
  2. Debt Overhang

    A debt burden that is so large that an entity cannot take on ...
  3. Grant

    The issuance of an award, such as a stock option, to key employees ...
  4. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  5. Options Backdating

    The process of granting an option that is dated prior to the ...
  6. Option Schedule

    A list of options grants to an employee or employees of a company ...
Related Articles
  1. Trading

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
  2. Trading

    The Dangers Of Share Dilution

    Investors need to be aware of the existence of dilutive securities and how they can affect existing shareholders.
  3. Trading

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  4. Insights

    5 Tech Companies With High Stock-Based Compensation (GOOGL, AMZN)

    Examine stock-based compensation among large tech firms to determine which factors are driving equity compensation and how executive grants are determined.
  5. Managing Wealth

    The Dangers Of Share Dilution

    Share dilution reduces the value of an individual investment and can drastically impact a portfolio.
  6. Trading

    The Dangers Of Options Backdating

    This form of executive compensation can pose serious risks for investors.
  7. ETFs & Mutual Funds

    Calculating Basic Earnings Per Share

    Basics earnings per share measures the amount of net income earned per share of outstanding stock.
  8. Trading

    The "True" Cost Of Stock Options

    Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.
  9. Trading

    A New Approach To Equity Compensation

    The new financial accounting standard known as FAS 123R could take a bite out of your portfolio. Find out why here.
  10. Investing

    How Does Dilution Work?

    Dilution refers to the reduction in the percentage equity ownership of a company due to additional equity being issued to other owners.
RELATED FAQS
  1. What is options backdating?

    Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly ... Read Answer >>
  2. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
  3. How do I calculate earnings per share with simple capital and complex capital structure?

    Learn the difference between simple and complex capital structures and how the structure affects a company's calculations ... Read Answer >>
  4. Why should investors consider the fully diluted share amount?

    Learn about the importance of considering the fully diluted shares, how it could affect a stock's share price and how dilution ... Read Answer >>
  5. What is an evergreen provision and how does it affect shareholders?

    It is common for publicly-traded corporations to provide more than just regular salary compensation to their management and ... Read Answer >>
  6. What's the difference between basic shares and fully diluted shares?

    Find out more about basic outstanding shares, fully diluted shares, the difference between the calculation of shares and ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center