Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85227
Authors: 
Hess, Dieter
Lueders, Eric
Year of Publication: 
2000
Series/Report no.: 
CoFE Discussion Paper 00/27
Abstract: 
Several studies indicate that stock option plans are becoming more and more a substantial part of compensation schemes in U.S. companies. This paper argues that for an employer the attractiveness of stock options arises from the U.S. Generally Accepted Accounting Principles (US-GAAP) which require no charge to earnings for specifically designed stock option plans if a company opts for footnote disclosure. This poses a substantial problem for security analysis since a firm's earnings may be considerably upward biased. Based on a case study of 20 companies out of the S&P 500 which rely heavily on employee stock options we arrive at the conclusion that the amount of hidden compensation cost can be significant. For some of the companies the misrepresentation of stated earnings exceeds usual immateriality limits by far. Therefore, we propose that the fair value method of Statement No. 123 Financial Accounting Standards Board should be made compulsory in order to restore the true and fair view which income as stated should provide.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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