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Accounting for Employee Stock Options: An Economics Perspective

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  • Junning Cai

    (University of Hawaii at Manoa)

Abstract

Instead of relying on accounting principles and illustrative accounting examples, this paper examines the rationale for ESO expensing from an economics perspective and has the following findings. In principle, while ESO expensing is justified under ESOs’ expense-postponing function, it is not under the employee-stimulating function. In practice, ESOs’ risk-sharing function poses a fundamental difficulty for option price models to estimate ESOs’ fair value; and mandatory ESO expensing would deter the use of ESO granting as an employee incentive mechanism. We suggest using the reservation wage as an alternative expensing method to achieve the goal of ESO expensing without its disturbance on ESO granting.

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File URL: http://128.118.178.162/eps/fin/papers/0410/0410007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0410007.

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Length: 27 pages
Date of creation: 08 Oct 2004
Date of revision: 14 Feb 2005
Handle: RePEc:wpa:wuwpfi:0410007

Note: Type of Document - pdf; pages: 27
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Web page: http://128.118.178.162

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Keywords: options; employee stock options; ESO expensing; accounting;

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