Research Uncovers IPO Pay Gap from Cheap Stock

Study finds widespread use of underpriced stock options before companies go public, with implications for regulators, investors, and boards.

Feb. 4, 2026 at 12:47am

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New research from the University of Notre Dame examines the prevalence, determinants and consequences of "cheap stock" options granted to executives before a company's initial public offering (IPO). The study found that the average IPO price is more than five times the exercise price of options issued in the fiscal year before the IPO, signaling a significant windfall for executives. Factors like venture capital backing and CEO compensation structures contribute to this pay gap.

Why it matters

The research validates concerns from the SEC that handing out cheap stock before an IPO can distort a company's financial picture. It also provides insights for investors and analysts to assess a company's long-term performance based on pre-IPO pay structures, and suggests boards should be wary of compensation plans that embed lasting incentive distortions.

The details

The study, led by Brad Badertscher from Notre Dame's Mendoza College of Business, analyzed the prospectuses of 963 U.S. companies that went public between 2007 and 2022. The researchers found that firms with more options grants, larger public offerings, and venture capital backing tended to have a greater gap between the IPO price and the exercise price of recently granted options. This "cheap stock" is linked to overpaying the CEO, disappointing IPO performance, and less investment in growth, leading to poor long-term stock returns.

  • The study analyzed companies that went public between 2007 and 2022.

The players

Brad Badertscher

The Deloitte Foundation Department Chair of Accountancy and Deloitte Professor of Accountancy at the University of Notre Dame's Mendoza College of Business, and the lead author of the study.

Bjorn Jorgensen

A co-author of the study from the Copenhagen Business School.

Sharon Katz

A co-author of the study from INSEAD.

Jeremy Michels

A co-author of the study from Purdue University.

U.S. Securities and Exchange Commission (SEC)

The regulatory body that frequently flags cheap stock grants when reviewing registration statements for companies trying to go public.

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What they’re saying

“The average firm's IPO price is more than five times the exercise price (price per share when stock options are exercised) of options issued in the fiscal year before the IPO.”

— Brad Badertscher, Lead author and Deloitte Foundation Department Chair of Accountancy and Deloitte Professor of Accountancy at Notre Dame's Mendoza College of Business (Management Science)

“We show that 'cheap stock' option grants are widespread and economically significant. It isn't just about high growth, lack of liquidity or IPO uncertainty. It's actually driven by specific incentives — like backing from venture capitalists and how managers are compensated.”

— Brad Badertscher, Lead author and Deloitte Foundation Department Chair of Accountancy and Deloitte Professor of Accountancy at Notre Dame's Mendoza College of Business (Management Science)

What’s next

The study has implications for regulators, investors, boards and researchers. It validates the SEC's concern that handing out cheap stock before an IPO can distort a company's financial picture, and provides insights for investors and analysts to assess long-term performance based on pre-IPO pay structures. The research also suggests boards should be wary of compensation plans that embed lasting incentive distortions.

The takeaway

This research sheds light on the widespread practice of granting underpriced stock options to executives before a company goes public, creating a significant windfall for insiders. It highlights the need for greater scrutiny of pre-IPO compensation structures to ensure alignment with shareholder interests and long-term value creation.