Re: establishmentarian whining
On the issue of valuing stock options: Can't they just apply Myron Scholes' formula? Gene Greetings from Ankara Gene, I don't know if anyone answered this but here is my answer. It is not appropriate to use the BlackScholes formurmula for the employee stock options. Firstly, BlackScholes results are applicable to plain vanilla European call and put options and the formula for the European call options also applies to the American call options because of an optimal exercise argument. Since such an argument is not valid for American put options, we have no formula for American puts and hence such options should be priced using some numerical method. As for the employee stock options the situation is much more complicated than the American puts. Firstly, these are perpetual options in the sense that there is no set exercise date. After the vesting period ends, you can choose to exercise them at any time from there till eternity, provided of course that you and the firm remain alive till eternity. Secondly, because of the vesting periods and provisions such options are indeed a portfolio of options, each of which has to be valued separately. For example, you may be given 1,000 options under the condition that only 200 of them are vested the first year, 200 the next year so forth. This means you are given a portfolio of five options, each of which is perpetual American call options with varying vesting, or better said, call-protection periods. Clearly, this animal is quite different than the plain vanilla American call options to which the BlackScholes call formula applies. A further comlication is that the firms can fire employees as they wish and employees can leave their firm if they so choose. Since such options are non-transferrable, they go worthless when either of this happens. One way to look at this is that embedded in these options are the firing option the firm holds and the leaving option the employee hold. To sum up, what we are looking at is an other-options-embedded call-protected perpetual American call option, which is a very difficult animal to price. Looked at from the point of view of the firm, you need to price a large porfolio such options issued at different times with different exercise prices and call-protection periods and so-forth and the task becomes much more difficult. I can give you more reasons but the above reasons should suffice. Best, Sabr} Get 25MB of email storage with Lycos Mail Plus! Sign up today -- http://www.mail.lycos.com/brandPage.shtml?pageId=plus
establishmentarian whining
washingtonpost.com Corporate Reform Could Go Too Far By Steven Pearlstein Friday, July 18, 2003; Page E01 In my hand is a news release from the Business Roundtable that would have been unthinkable 18 months ago. Back then, the Roundtable's president, John Castellani, was adamant in an interview that Enron was really just one bad apple and that there was no need for new laws or regulations requiring fundamental corporate reform. Now, in a sign of just how far the Roundtable has retreated, Castellani boasts about how many of the biggest corporations have gone beyond the reforms mandated by Washington and are voluntarily embracing ideas such as regular meetings of independent directors (55 percent) and new procedures for shareholders to talk directly with the board (66 percent). The timing of this release may be no coincidence. The Roundtable is anxious to forestall the next installment in the reform process -- a new rule making it easier for shareholders to nominate their own slates of directors. Some of the corporate lobbying against the idea has been a bit overdone, with that end of capitalism as we know it quality to it. But I do wonder whether we've reached that tricky point in the reform cycle where the political momentum is such that the risk is of going too far rather than not going far enough. In the case of allowing shareholders to nominate directors, for example, much of the rationale seems to be based on the romantic notion that corporations should be laboratories of democracy, with open annual elections for all directors, and majority and minority factions. In practice, I suspect running a corporation requires more stability and internal harmony than the democratic model allows. Of course, there will be situations when a corporate board repeatedly insists on being more responsive to management than shareholders. But the way to deal with such situations, it seems to me, is to provide a mechanism for shareholders to register a vote of no confidence in the directors. They should have access to the proxy packet to lay out their case and solicit votes for the annual meeting. And if they garner a shareholder majority, only then should they gain the right to nominate a competing slate of directors. Such an arrangement probably would satisfy neither the Roundtable nor the die-hard reformers. But at the moment, it looks like a sensible compromise that has attracted serious interest from the Securities and Exchange Commission staff and a majority within the agency. A similar compromise is needed on the equally contentious issue of stock options. The passion surrounding this arcane accounting question certainly suggests that stock options have been tarred as the primary source of corporate malfeasance during the '90s boom. In truth there were many villains -- just as there were many companies where options were used to attract employees and give them performance incentives. Last week, Microsoft joined the growing list of companies that have concluded that restricted stock or simple cash bonuses are better ways to compensate employees than stock options. I suspect they are right. But at the same time, I don't see why the accounting system or the tax code should try to dictate such a result or even tilt the decision in that direction. This is something best left to the marketplace. Along those lines, the best policy was probably laid out by Sen. Carl Levin of Michigan long ago: Don't require companies to expense stock or stock options granted to employees, but don't let them take tax deductions for them, either. Although stock and options obviously have value, calculating that value involves the kind of guesswork that only undermines the credibility of a company's income statement. Why not simply record all the information about the options on the balance sheet, along with all the other corporate liabilities, and let investors and analysts make all the adjustments they want if they want to think of options as an annual operating expense? In the end, the problem with stock options was not that they were used to manipulate earnings and fool investors -- it's that they gave executives too great an incentive to manipulate earnings through other means. Or put another way, it was how stock options were misused that was the fundamental problem, not how they were accounted for.
Re: establishmentarian whining
On the issue of valuing stock options: Can't they just apply Myron Scholes' formula? Gene Coyle Eubulides wrote: washingtonpost.com Corporate Reform Could Go Too Far By Steven Pearlstein Friday, July 18, 2003; Page E01 In my hand is a news release from the Business Roundtable that would have been unthinkable 18 months ago. Back then, the Roundtable's president, John Castellani, was adamant in an interview that Enron was really just one bad apple and that there was no need for new laws or regulations requiring fundamental corporate reform. Now, in a sign of just how far the Roundtable has retreated, Castellani boasts about how many of the biggest corporations have gone beyond the reforms mandated by Washington and are voluntarily embracing ideas such as regular meetings of independent directors (55 percent) and new procedures for shareholders to talk directly with the board (66 percent). The timing of this release may be no coincidence. The Roundtable is anxious to forestall the next installment in the reform process -- a new rule making it easier for shareholders to nominate their own slates of directors. Some of the corporate lobbying against the idea has been a bit overdone, with that end of capitalism as we know it quality to it. But I do wonder whether we've reached that tricky point in the reform cycle where the political momentum is such that the risk is of going too far rather than not going far enough. In the case of allowing shareholders to nominate directors, for example, much of the rationale seems to be based on the romantic notion that corporations should be laboratories of democracy, with open annual elections for all directors, and majority and minority factions. In practice, I suspect running a corporation requires more stability and internal harmony than the democratic model allows. Of course, there will be situations when a corporate board repeatedly insists on being more responsive to management than shareholders. But the way to deal with such situations, it seems to me, is to provide a mechanism for shareholders to register a vote of no confidence in the directors. They should have access to the proxy packet to lay out their case and solicit votes for the annual meeting. And if they garner a shareholder majority, only then should they gain the right to nominate a competing slate of directors. Such an arrangement probably would satisfy neither the Roundtable nor the die-hard reformers. But at the moment, it looks like a sensible compromise that has attracted serious interest from the Securities and Exchange Commission staff and a majority within the agency. A similar compromise is needed on the equally contentious issue of stock options. The passion surrounding this arcane accounting question certainly suggests that stock options have been tarred as the primary source of corporate malfeasance during the '90s boom. In truth there were many villains -- just as there were many companies where options were used to attract employees and give them performance incentives. Last week, Microsoft joined the growing list of companies that have concluded that restricted stock or simple cash bonuses are better ways to compensate employees than stock options. I suspect they are right. But at the same time, I don't see why the accounting system or the tax code should try to dictate such a result or even tilt the decision in that direction. This is something best left to the marketplace. Along those lines, the best policy was probably laid out by Sen. Carl Levin of Michigan long ago: Don't require companies to expense stock or stock options granted to employees, but don't let them take tax deductions for them, either. Although stock and options obviously have value, calculating that value involves the kind of guesswork that only undermines the credibility of a company's income statement. Why not simply record all the information about the options on the balance sheet, along with all the other corporate liabilities, and let investors and analysts make all the adjustments they want if they want to think of options as an annual operating expense? In the end, the problem with stock options was not that they were used to manipulate earnings and fool investors -- it's that they gave executives too great an incentive to manipulate earnings through other means. Or put another way, it was how stock options were misused that was the fundamental problem, not how they were accounted for.
