Jordan Hayes wrote:
>
>
> They are _deferred_ compensation, just like future sales are deferred
> revenues. But until they is, they ain't. Get it? The fact is
> that options are interesting and everyone has a hard time valuing
> them. Realistically, most exprire worthless. So your idea of
> accounting for them before they "are" anything is a little naive.
Sorry, I missed this. Yes, sure, some expire worthless, and others are exercised at a much higher cost than B-S would have predicted. Which is kind of the point of B-S modeling, right? On the other hand, if you can show that B-S significantly overestimates the value of options, that'd probably put you in the running for the Nobel prize.
Company X can issue option Y to an employee. Or it can buy option Y on the market, at something near B-S price, and give it to the employee. Both cases are equivalent, from the point of view of the shareholder. Yet, in the first case, the company gets to pretend the transaction not only is costless *now*, but it may actually increase future earnings, thanks to the tax deduction. In the other, the full cost of the option is deducted. Why?
And, in any case, I insist that I don't care much whether they are expensed at issue or at exercise. If B-S are not completely full of shit (they may be, I don't know) it should make little difference. But the absolutely *should* be expensed at some point, since they burn cash. And that would make most NASDAQ companies look much worse than they do now.
Enrique
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