Options Pricing and Accounting Practice

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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.

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About the Author

 

Charles W.
Calomiris
  • Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School. He is also a research associate at the National Bureau of Economic Research, a member of the Shadow Financial Regulatory Committee and the Financial Economists Roundtable, and the coordinator of the Bank Performance and the Economy program at the Center for Financial Research at the Federal Deposit Insurance Corporation. Until 2007, he was the co-director of AEI's Financial Deregulation Project. His research at AEI spanned several areas, from banking and corporate finance to financial history and monetary economics. Calomiris also served on the 2000 International Financial Institution Advisory Commission. Known as the Meltzer Commission, this congressionally mandated group recommended specific reforms of the International Monetary Fund, the World Bank, the regional development banks and the World Trade Organization to the U.S. government.
  • Phone: 2128548748
    Email: ccalomiris@aei.org

 

R. Glenn
Hubbard
  • Glenn Hubbard, a former chairman of the President's Council of Economic Advisers, is currently the dean of Columbia Business School. He specializes in public and corporate finance and financial markets and institutions. He has written more than ninety articles and books, including two textbooks, on corporate finance, investment decisions, banking, energy economics, and public policy. He has served as a deputy assistant secretary at the U.S. Treasury Department and as a consultant to, among others, the Federal Reserve Board and the Federal Reserve Bank of New York.
  • Assistant Info

    Name: Veronika Polakova
    Phone: 202-862-4880
    Email: veronika.polakova@aei.org

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