Don,
You've said quite a mouthful, and have given me much to think about! I agree with much of what you say, particularly your comments about the inadequacy of accounting systems. But I also disagree with a number of your points. Let me take just one as a point of departure: employee stock options.
Let's assume that we have a company with a capitalized value of $10 BB, and with 100MM shares o/s. Thus, the value of each share is $100. Now suppose the company issues options to employees for 1 MM shares, for which the company will receive $10 per share. After the exercise of the options the value of the company ought to increase to $10.01 BB,and there will be 101 MM shares o/s. Therefore, the value of each share will fall to $99.109. I believe that this constitutes an expense to shareholders, and the expense is $89,109MM.
Now you may argue that since the options program was known in advance, the market has already discounted its effect in the price of the shares, and you may be right.
But then how do you explain away the practice of repricing options in the event that the share price falls below certain levels? I have seen this occur with many companies. Among others, DELL, IBM, SEG, PSFT, NETA. Certainly, the market cannot discount that.
Another reason I don't consider option grants as a form of capital restructuring is that when a company issues additional stock for the business purposes the company receives market value for the stock. But in the case of employee stock options it receives far less than market value. Many observers have contended that the best way to deal with this issue is to calculate the value of the option using the B/S model at the time the grant is issued assuming a European-style option.
You also said:
If a company XYZ pays $1B for its factor inputs and generates $2B in revenues, it has a profit of $1B, whether it is private or public, whether it has 1 shareholder or 6 billion, or whether the total number of shares is 1 or 1 per atom in the universe. Profits and ownership should be treated as orthogonal.
True. But my focus is on the investor (not the company), and the profit the investor realizes by holding a share of stock.
There are many other interesting points that you raised that I want to discuss in future posts.
Thanks for your economic insights -- they are much appreciated.
TTFN,
CTC |
