Markets’ Treatment of Stock-Based Compensation Can Distort Valuations
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March 27, 2025
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This article from ABI Journal was first published in March 2025. The entire publication is available at: http://abi.org/abi-journal/markets%E2%80%99-treatment-of-stock-based-compensation-can-distort-valuations.
The increasing use of Stock-Based Compensation (“SBC”) in public companies raises important concerns about financial transparency. In this American Bankruptcy Institute (“ABI”) Journal article, Daniel Kokini and John Yozzo discuss how, while GAAP accounting treats SBC as a real business expense, many firms conveniently remove it from adjusted EBITDA, creating the illusion of higher profitability. This practice skews valuation metrics, making companies appear more valuable than they truly are. Analysts and investors often accept these adjusted figures without question, leading to inflated market perceptions. Unless the investment community pushes back, the widespread reliance on adjusted EBITDA as a performance measure will continue distorting financial evaluations and misleading stakeholders.
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March 27, 2025
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