GV, I have yet to see anyone offer any evidence that Black-Scholes isn't highly accurate, and certainly greater than 50%. It is a red herring thrown up by expensing opponents without any logic or understanding of Black-Scholes.
The example you just gave to Lizzie is a good one. Back in 2000 (for the sake of argument), Intel awarded some of its employees with options that have a strike price of $75. Stock drops, those options are now currently worthless. Assuming they stay worthless until they expire in 2010, the net effect on the company's equity, worth, and valuation is zero. Yet under Black-Scholes, the "expense" would remain on the books.
If the model of options valuation is used, then that implies that the employees, when awarded the options, used to have something of worth but now experienced a capital loss. Is that loss tax deductible just like any loss? Probably not, since that in itself would open up a whole new can of worms. (For example, if the Black-Scholes valuation can be counted as a capital loss, then when they are granted, they can be counted as income for tax purposes. How many employees will be thrilled to pay taxes on all of the worthless options they receive?)
Net effect: Intel records an expense that never existed, except in vapor.
Now I realize a lot of wealth in this world exists in vapor, including home equity, shares in a corporation (e.g. Bill Gates can't exactly liquidate all of the shares of MSFT he owns at the current price), etc. But this sort of "wealth" is just a function of the market, not a creation of an accounting practice. In other words, Black-Scholes just feels too artificial because the value itself is based on a mathematical model, not necessarily the market.
OK, I've said enough. I realize this has all been discussed before, so no need to spend more time trying to explain it to me. If that's what the accountants decide on, then I guess the market will need to account (no pun intended) for this "phantom expense."
Tenchusatsu
P.S. - GV, the other issues you raise concerning market volatility and relation to a company's performance are irrelevant, unless the goal of Black-Scholes is to discourage the rampant abuse of options. And that goal would be a far cry from the stated goal of simply being accurate with the numbers. It may be a positive consequence of accurate numbers, but what happens if the numbers aren't that accurate as I explained before? |
