August 1, 2002
From the desk of Mindles H. Dreck:Finance Professors Love Their Formulas
To promote its lottery-like accounting for ESOs, the FASB invites companies that expense their estimates to do away with all the useful information required in every other annual report. In the name of increased transparency, all information about employee stock options from Coca Cola, Bank One and The Washington Post is about to vanish completely. In its place, a meaningless and unexplained estimate of "fair value" will be mingled with other operating expenses in a way that will make future earnings statements inherently indecipherable and inevitably incorrect. It is about to become very difficult to make an informed long-term investment in any company that adopts this politically popular accounting gimmick.
It is amazing to me that three professors (including a nobel prize winner), Warren Buffett and so many others refuse to address the real arguments here. Coca Cola had to expense their options by their design, and doing so relieves them of the detailed disclosure provided, as Reynolds points out above. Other companies with relatively insignificant options programs are doing the same to gain some Cheap PR points.
I continue to hope Buffett, Merton, et. al. are making a big deal about options in the hopes it will distract reformers from attempting something more far reaching. The WSJ article linked above is a pile of NYTimes-like assertions of expert unanimity, ad vericundiam and strawman fallacies and asserted popular groundswells. One is hopeful that these eminent individuals do better everyday in front of the students.
Posted by Mindles H. Dreck at August 1, 2002 8:31 AM | TrackBack | Technorati inbound links"); ?>It seems to me that this push to expense options, and the ensuing debate over how to account for them, is a red herring. Only "new economy" companies are really effected, but they are all in the crapper anyway, and it will not come as a shock to anyone to find that they granted lots of cheap options as compensation to executives over the last few years. The problem is, and always has been, the creation of unrealistic expectations in a bubble marketplace, and the lengths that greedy CEOs, egged on by similarly greedy shareholders, will go to meet or exceed those expectations. It might be the oldest story in commerce.
Posted by: Paul Orwin on August 1, 2002 9:17 PMComments are Closed.