Accounting for Employee Stock Options: An Economics Perspective

Junning Cai ()

Finance from EconWPA

Abstract: Instead of relying on accounting principles and illustrative accounting examples, this paper examines the rationale for ESO expensing from an economics perspective and has the following findings. In principle, while ESO expensing is justified under ESOs’ expense-postponing function, it is not under the employee-stimulating function. In practice, ESOs’ risk-sharing function poses a fundamental difficulty for option price models to estimate ESOs’ fair value; and mandatory ESO expensing would deter the use of ESO granting as an employee incentive mechanism. We suggest using the reservation wage as an alternative expensing method to achieve the goal of ESO expensing without its disturbance on ESO granting.

Keywords: options; employee stock options; ESO expensing; accounting (search for similar items in EconPapers)
JEL-codes: G13 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-bec
Date: 2004-10-08, Revised 2005-10-27
Note: Type of Document - pdf; pages: 27

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410007

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