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

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Listed:
  • Hess, Dieter E.
  • Lüders, Erik

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.

Suggested Citation

  • Hess, Dieter E. & Lüders, Erik, 2000. "New economy accounting : why are broad-based stock option plans so attractive?," ZEW Discussion Papers 00-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5322
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    File URL: https://www.econstor.eu/bitstream/10419/24386/1/dp0039.pdf
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    References listed on IDEAS

    as
    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 1999-59, Board of Governors of the Federal Reserve System (U.S.).
    2. Yermack, David, 1998. "Companies' Modest Claims about the Value of CEO Stock Option Awards," Review of Quantitative Finance and Accounting, Springer, vol. 10(2), pages 207-226, March.
    3. Johnson, Shane A. & Tian, Yisong S., 2000. "The value and incentive effects of nontraditional executive stock option plans," Journal of Financial Economics, Elsevier, vol. 57(1), pages 3-34, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Accounting; US-GAAP; stock option programs;

    JEL classification:

    • G0 - Financial Economics - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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