value at thetime of the grant.When firms give away or
receivesomethingofvalue,evenifthatvalueisanestimate,
we have to record the transaction.
2.Optionpricingmodelsdonotprovidepreciseestimatesof
optionvalue.Itistruethatweneedoptionpricingmodelsto
valueoptionsatthetimeofthegrant,andthatthesemodels
make assumptions thatmaynot always hold for employee
options. Thus, the values we get from these models are
estimatesandnotprecisevalues.Aswewillseelaterinthe
subsection on option pricing models, though, there are
adaptationsofthesemodelsthatdoareasonablygoodjobof
fixing the faulty assumptions. Furthermore, we can
confidentlystatethateventhemostimpreciseoptionpricing
modelislikelytoyieldavalueclosertothetruevaluethan
themodelusedunderconventionalaccounting,whichvalues
options at exercise value.
3.Expensingoptionswillcreatemorevariabilityinearnings
overtime.Optionsthatarerecordedatonevalueatthetime
oftheirgrantingwillchangeinvalueovertime.Somemay
becomeworthlessandsomewillbecomemorevaluable.This
willcreatemoreearningsvariabilityovertime,butthereare
twocounterargumentswewouldpresent.Thefirstisthatthe
higher variability in earnings reflects reality: Firms that
choose to use options to reward employees are adding
volatility tostockholder earnings.Thesecond isthat using
options to compensate employees is a choice: Firms can
choosetousestockorrestrictedstockforcompensationand
have less earnings variability over time.
4.Youngfirmswillnotbeabletohireemployeesiftheyhave
to expense options. If those who argue against employee