Trends in Expensing Stock Options

Paper Summary:

This paper provides a comprehensive review and discussion of the relevant literature to define what stock options are and how they are used. An examination of traditional and new valuation methods is followed by a review of current and future trends in expensing stock options. A summary of the research is provided in the conclusion. Two excellent graphics are also provided within the text.

From the Paper:

"During the past decade, American corporations have granted more and more stock options as compensation, especially for top executives. An option gives the holder the right to buy or sell stock at a specified price by a specific date. If the right to buy shares is set at a low price and the stock goes up, the option holder makes a profit. Critics of the proposed changes argue that options provide vital incentives for skilled employees and executives, especially those who work for risky high-tech ventures. Advocates of reform maintain that options give executives too much incentive to inflate profits falsely to boost the value of their options. Also, they argue that because stock-option costs are not counted in quarterly earnings statements, companies can mask their true cost to investors."

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