subsequentdecreasesintheshareprice(orlackofan
increase) are not reflected in accounting for the
deferredtaxassetuntiltherelatedcompensationcost
is recognized for tax purposes. The effects of
subsequentstockpriceincreasesthatgenerateexcess
tax benefitsare recognizedwhen they affect taxes
payable.Overtime, wecanexpect to seetheremainingdifferences
narrow and a convergence between U.S. and international
standards.
Options’ Effect on Value
Whydoesthegrantingofoptionsaffectvaluepershare?Note
thatnotalloptionsdo.Infact,optionsissuedandlistedbythe
optionsexchangeshavenoeffectonthevaluepershareofthe
firmsonwhichtheyareissued.Theoptionsissuedbyfirms
dohaveaneffectonvaluepershare,sincethereisachance
thattheywillbeexercisedinthenearorfarfuture.Giventhat
theseoptionsoffertherighttoindividualstobuystockata
fixedprice,theywillbeexercisedonlyifthestockpricerises
above that exercise price. When firms grant options to
employees, it is existing stockholders who pay for these
options. Consequently, thequestionis not whetheroptions
affect value buthowthey affect value.
In this section, we consider three levels at which options
affectequityvaluepershare.Thefirstandnarrowestmeasure
istheeffectthatgrantingoptionsinthecurrentyearwillhave
onthecurrentearningsofafirm.Thesecondisthepotential
dilutioneffectcreatednotjustbyoptionsissuedinthecurrent
yearbut also bythe cumulativeoptions outstanding atthe