Options: Separating the Cash from the Rash


Another side to the options-expensing debate
The purpose of financial statements is to inform the reader/investor about the financial health of a company; these statements are not the place to create or enforce corporate governance policies or penalize management excesses.

Focus on cash flow
Valuation is inextricably linked to cash flow. A company is the sum of its cash flows which is the basis of the dividend discount model. Accounting changes that reduce the transparency of corporate cash flows should be avoided. Expensing options would place a volatile non-cash item on the income statement just as we are removing other non-cash items from the income statement (e.g. goodwill). The treatment is inconsistent.

Studies show positive correlation with corporate performance
We don't take a position on whether options are inherently good or bad and are fine if CEOs are paid in buffalo skins or bulk corn. We are interested in the appropriate accounting and the transparency of cash flows. Having said that, several empirical studies show that when properly used (i.e., distributed broadly to more than half of all employees), options are positively correlated with corporate performance.


Options: Separating the Cash from the Rash (15 pages)