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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Bob Rudd who wrote (13984)	2/21/2002 9:31:06 PM
From: Don Earl	Read Replies (2) \| Respond to of 78661

Bob, While I found some of the arguments in the study related to options persuasive, I'm not 100% sure they were convincing, or necessarily an accounting issue. I won't say some companies option grants aren't abusive to the point of being shameful, but I have trouble seeing it as a hit to the bottom line. The common situation I see with options is where they are, for example, issued with a $10 strike and exercised at $15. The company issues new stock at $10, which the company keeps, and the "employee" gets the extra $5. Unless book value is above $10, the transaction is anti-dilutive to shareholder equity, and in any case, adds cash to the balance sheet. As far as being dilutive to earnings; for most companies they would have to issue one heck of a lot of stock before it would show up as a fraction of a penny. In this type of transaction I have a hard time following the reasoning that the options should be marked to market at the time of issue and result in a hit to earnings. I do see the reasoning behind a situation where the company has to go into the open market to purchase stock at a higher price than the strike. In that example it is a cash cost for compensation and should be deducted from earnings. As far as excessive issuing of options, or repricing of options, while I totally agree it's a bad policy, I don't quite see it as an accounting issue. The practice is usually disclosed to a point where investors can avoid the company if it's overly obnoxious. My mind is more or less open on the subject, but I think in general I consider options less of a major issue than the type of abuse that artificially inflates earnings by failing to properly account for operating costs, or recognizes revenues that aren't really there.