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For the last time: stock options are an expense
Zvi Bodie1, Robert S Kaplan, Robert C Merton
1Boston University's School of Management, USA.
Harvard Business Review
|March 14, 2003
Summary
Stock options should be expensed on financial statements, not just footnotes. This ensures accurate reporting of real cash-flow implications and prevents accounting standards from distorting executive compensation choices.
Area of Science:
- Accounting
- Corporate Finance
- Executive Compensation
Background:
- The accounting treatment of stock options has been a contentious issue, particularly after the dot-com bubble burst.
- Critics of expensing stock options argued against it, but the debate has resurfaced with renewed intensity.
Purpose of the Study:
- To examine and refute arguments against expensing stock options.
- To demonstrate the economic necessity and feasibility of recording stock options as expenses.
Main Methods:
- Analysis of arguments opposing stock option expensing.
- Economic and financial statement impact assessment of stock option grants.
- Examination of accounting distortions caused by footnote-only reporting.
Main Results:
- Stock option grants have significant, reportable cash-flow implications.
- Effective methods exist to quantify these financial implications.
- Excluding stock options from financial statements creates economic distortions and encourages suboptimal compensation choices.
Conclusions:
- Expensing stock options is economically indefensible to omit from financial statements.
- Accounting standards should not subsidize specific compensation methods.
- Companies should select compensation based on economic benefits, not accounting treatment.