Tom Lehman uswa12 at Lorainccc.edu
Mon Mar 13 06:00:42 PST 2000

Enrique--To shift the discussion a little bit. Has anyone ever seen a study of the economic impact of the printing press? Somehow I can't recall the "invention" of the printing press causing a financial bubble or wild speculation in hardware or software makers. :o)


Enrique Diaz-Alvarez wrote:

> Jordan Hayes wrote:
> > From enrique at ee.cornell.edu Sun Mar 12 14:17:16 2000
> >
> > 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.
> >
> > Well, a few points:
> >
> > * BS just gives you a theoretical price _at the moment you calculate_
> > so it says nothing about the value of that option in the future.
> Well, yeah. The company could give that option to the employee. Or they
> could sell it at that moment in the market and get cash. All the
> differences between employee's stock options and actually traded options,
> of which I am perfectly aware, are tangential to the fact that those
> options have *some* value, which is given to the employee, but not counted
> in reported earnings.
> > Are you just saying that accounting is tricky?
> Deciding whether to price the options when given or at exercise or in some
> other way is tricky. Ignoring a major business expense altogether is
> fraudulent, I think.
> >
> > But the absolutely *should* be expensed at some point,
> > since they burn cash.
> >
> > But issuing the stock in the first place wasn't income; buying it
> > back shouldn't be an expense.
> >
> > And that would make most NASDAQ companies look much worse
> > than they do now.
> >
> > It just bums you out that investors don't understand the dilutative
> > effect that options have on a stock?
> In theory the effect may be only dilutive, but since management, for
> obvious reasons, almost exlusively would rather burn cash repurchasing
> shares than issue new ones, the actual effect of options is to redirect
> business profit towards employee's (largely upper management's) pockets,
> rather than diluting ownership. And I think accounting definitions should
> reflect reality, to the extent that it's possible.
> But I agree that the options as expense/dilution debate is largely
> metaphysical, and barren, since the net effect is the same: to
> redistribute wealth from shareholders to insiders. The main point stands:
> this redistribution is massive, and unaccounted for in the P/E ratios, so
> the actual valuation is much worse than a mere 400 P/E ratio.
> The investors we are talking about here are the rich and stupid, for the
> most part. I am starting to think that parting them from their money is a
> sort of public service, but I am still very interested in the mechanics of
> the separation.
> Enrique
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