Enrique Diaz-Alvarez enrique at anise.ee.cornell.edu
Fri Mar 10 10:42:53 PST 2000

Rakesh Bhandari wrote:

> But Charles that Floyd Norris report did not cite any actual tampering with
> the books.

"Earnings quality" is probably the lowest it has been this century. There is a good reason why no tech companies, not even mature, nominally profitable ones, pay significant dividends - they just don't have the free cash flow. I already mentioned the latest earnings scam: count capital gains as profit, without deducting the corresponding capital expenditures as cost. There is an even bigger one: stock options. Neither the cost of granting stoc options nor the cost of exercised stock options to the company (difference between market price and exercise price) are counted towards earnings - however, and astonishingly, this difference *is* deducted from the company's taxable earnings. (accountants correct me here if I am wrong, please). So, the more options a company issues, the higher its reported "earnings" are.

If stock options were expensed using, say, the Black Scholes model, the NASDAQ would collectively report an enormous loss, year after year. Of course, a 70% or so stock price drop would correct the problem by rendering many options worthless.

> Yours, Rakesh

-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique

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