Overhang
What Is Overhang?
Overhang is a measure of the potential dilution of stock shares due to potential awards of stock-based compensation. It is typically addressed as a percentage and is calculated as stock options granted plus the excess options to be granted partitioned by the total shares outstanding ((SO+RO)/TSO).
Grasping Overhang
There is no rule of thumb for deciding how much overhang is destructive to common shareholders, yet generally talking, the higher the number, the greater the risk. The options overhang diminishes after a public offering in light of the fact that the number of shares outstanding increments. On the off chance that a company has an exceptionally high options overhang, it must produce even higher levels of growth and profits to compensate for the overhang's dilutive effects on earnings per share (EPS) and in this manner investor returns.
This, thus, can lead managers to face more risk, challenges out less in dividends, and assume more obligation — all of which can result in greater volatility in the company's stock price. Companies with high levels of employee stock ownership, then again, will generally have more grounded financial performance, pay higher dividends, and see less stock price volatility.
Instructions to Calculate Overhang
The easiest method for working out options overhang is to include existing and future option issues partitioned by the total number of stock outstanding. For instance, assume a company has proactively issued 50,000 options and has plans to disseminate 50,000 more. Expecting that the company has 1 million shares outstanding, then, at that point, the total overhang is (50,000 + 50,000)/a million = 10%.
Utilized in the broad sense, market overhang can allude to any situation where investors hold back from an asset due to uncertainties about the not so distant future.
Special Considerations
According to a 2020 study by executive compensation consultant F.W. Cook and Co., small-cap companies grant an essentially higher percentage of their stock options to executives as compared to large-cap companies. Technology companies likewise have the most reduced share of awards granted to senior management while the retail and industrial sectors have the highest.
Since an options overhang can adversely affect the price of a stock, entrepreneurs and company management generally devise HR strategies to relieve its impact. Performance-based options are one such strategy. The odds are bring down that an employee will exercise performance-based options versus traditional stock options that are not tied to performance and are practically 100% to be exercised, once their vesting period is finished.
Highlights
- Overhang is normally addressed as a percentage and is calculated as stock options granted plus the leftover options to be granted separated by the total shares outstanding.
- Overhang is a measure of the expected dilution to which common shareholders are presented due to potential awards of stock-based compensation.
- Overhang is calculated by partitioning the number of existing and future option issues by the total number of stock outstanding.
- The higher the overhang number, the greater the risk.
- All the more broadly, overhang can likewise allude to the descending pressure brought about by the presence of a large block of shares that could be sold.
FAQ
What Is Risk Overhang?
In insurance, risk overhang alludes to situations where continuous exposure to past transactions can limit an insurer's activities in the present. This is typically the case whenever an insurer needs to pass on lucrative opportunities since they can't face any more risk.
What Is Bearish Overhang?
Bearish overhang alludes to a situation where purchasers are hesitant to purchase a certain asset, due to the presence of a large block of that asset that would make prices fall assuming the block were sold. This normally alludes to stock shares, however it can likewise allude to commodities. For instance, during the discussions over U.S.- Iran sanctions, a few analysts cautioned of a "bearish overhang" brought about by an expected sell-off of the Iranian oil supply.
What Is the Definition of Overhang?
In the broadest definition, market overhang alludes to a situation where customers or investors hang tight for future events as opposed to buying a certain product or stock. This is normally a direct result of uncertainties or fears with respect to that stock's close term future.
What Is Stock Overhang?
Broadly talking, stock overhang alludes to situations where a couple of shareholders have a large block of stock shares, raising the possibility of a price drop in the event that they sell them at the same time. Stock overhang is most common in situations where employees are compensated with a large number of company shares, yet it might likewise apply to the stock holdings owned by large institutional investors.
