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New economy accounting : why are broad-based stock option plans so attractive?

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  • Hess, Dieter E.
  • Lüders, Erik
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    Abstract

    Several studies indicate that stock option plans are becoming more and more a substantial part of compensation schemes in U.S. companies. This paper shows the tax implications and accounting rules for stock option plans. By comparison of the tax and accounting rules for different compensation schemes we show that the popularity of stock options may be mainly due to the U.S. Generally Accepted Accounting Principles (US-GAAP) which require no charge to earnings for speciffically designed stock option plans if a company opts for footnote disclosure. Thus, for these companies the stated earnings are higher than their economical situations justify. Based on a case study of 20 companies out of the S&P 500 which rely heavily on employee stock options we arrive at the conclusion that the amount of hidden compensation cost can reach economically signifficant amounts. Since this topic seems to be widely neglected it is questionable whether stock prices reflect these hidden cost. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 00-39.

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    Date of creation: 2000
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    Handle: RePEc:zbw:zewdip:5322

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    Keywords: Accounting; US-GAAP; stock option programs;

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    1. J. Nellie Liang & Steven A. Sharpe, 1999. "Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-59, Board of Governors of the Federal Reserve System (U.S.).
    2. Johnson, Shane A. & Tian, Yisong S., 2000. "The value and incentive effects of nontraditional executive stock option plans," Journal of Financial Economics, Elsevier, Elsevier, vol. 57(1), pages 3-34, July.
    3. David Yermack, 1996. "Companies' Modest Claims About the Value of CEO Stock Option Awards," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 96-42, New York University, Leonard N. Stern School of Business-.
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