optionsarebelieved,expensingoptionswillbethedeathknell
foryoungtechnologyfirms.Thesefirms,itisargued,willno
longerbeabletoissuetheoptionsthattheyusedtobecauseof
thelossesthatthey wouldnowhaveto report.Wedonot
believethatthereisabasisforthisargument.First,investors
have shown that they are willing to invest in young
technology firms with growth potential, evenif they have
losses currently. Second, any young firm whose business
modelandoperatingmarginsaredependentontheaccounting
treatmentofoptionsforitslong-termprofitabilityandvalueis
fundamentally a troubled firm.Perhaps suchfirms will go
under with option expensing—and they should.
5.Optionsareanoncashexpense.Therearesomeaccounting
andvaluationanalystswhoarguethatoptiongrantsdonot
affectcashflowsandthattheythereforedonotaffectvalue.
This argument makes no sense. After all, if the
option-grantingfirmhadissuedtheoptionstothemarket(as
traded warrants) and used the resulting cash proceeds to
compensate employees, we would have considered it an
operating expense.Wecannotreward firms forusing their
equityascurrency.Ifwedo,firmsmayverywellswitchto
payingforeverythingwithequity(stockoroptions)andclaim
to have no cash expenses at all.
- The information about employee options is already
available in financial statements, and expensing is just a
formality.Thisistheargumentthathasthemostresonance.
Sincethelate1990s,firmshaveprovidedinformationonboth
option grants in the current year and outstanding options.
Analystswhowant toadjustearningsandcash flowshave
thereforebeenabletodoso,andexpensingtheoptionswill
havelittleeffectontheirvaluations.Unfortunately,thereare