What is 'Overhang'

Overhang is a measure of the potential dilution to which common shareholders are exposed due to possible awards of stock-based compensation. It is usually represented as a percentage and is calculated as stock options granted, plus the remaining options to be granted divided by the total shares outstanding.

BREAKING DOWN 'Overhang'

There is no rule-of-thumb for determining the level of options overhang that is harmful to common shareholders, 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 and profits to compensate for the overhang's dilutive effects on earnings per share and therefore investor returns.

This, in turn, can lead managers to take on more risk, pay out less in dividends, and take on more debt. This can result in greater volatility in the company's stock price. Companies with high levels of employee stock ownership, on the other hand, tend to have stronger financial performance, pay higher dividends, and see less stock price volatility.

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