Options Pricing and Accounting Practice

The full text of this working paper is available as an Adobe Acrobat PDF file.

Summary

In the wake of recent corporate scandals, some have advocated changing the rules for accounting for stock option grants, arguing that stock options represent a real cost to shareholders and should therefore be included as an expense in a firm’s financial statements.

This paper finds that there are practical problems that make it extremely difficult to create accounting conventions to properly value stock options, and even if valuing options were a straightforward process, the potential benefit of developing rules requiring options to be expensed would be small.

The authors conclude that establishing rules to require options to be expensed would likely do more harm than good.

Charles W. Calomiris and R. Glenn Hubbard are visiting scholars at AEI.