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Accounting for Employee Stock Options: An Economics Perspective

Author

Listed:
  • 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.

Suggested Citation

  • Junning Cai, 2004. "Accounting for Employee Stock Options: An Economics Perspective," Finance 0410007, EconWPA, revised 27 Oct 2005.
  • Handle: RePEc:wpa:wuwpfi:0410007
    Note: Type of Document - pdf; pages: 27
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    File URL: http://econwpa.repec.org/eps/fin/papers/0410/0410007.pdf
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    More about this item

    Keywords

    options; employee stock options; ESO expensing; accounting;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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