firm; the exercise of options will increase the number of
sharesatsomefuturedate,butexpectationsofthathappening
willaffectthevaluepersharetoday.Thethirdandbroadest
measure looks atthe effect that thecontinued granting of
options willhaveon expectedfutureearningsand thus on
value per share.
Earnings Effect
In an earlier section, we presented the argument (which
accountingstandardshavenowacceptedforthemost part)
thatemployeeoptionsarecompensationandshouldbetreated
as partof operating expenses. Ifwe acceptthis argument,
firmsthatgrantoptionsaspartofcompensationwillreport
lower earnings.
Theearningseffectofoptiongrantsvariesacrossfirms.Ina
studyoftheS&P 500 andtheNASDAQ-100firms,research
analysts at Bear Stearns estimated the effect of employee
options being treated as expenses on the earnings of
individual firms.
9 Onaverage,theresearchersestimatedthatearningswould
decline 8 percent at S&P 500 companies, if optiongrants
weretreatedasexpenses,andby 25 percentatNASDAQ-100
companies in 2004.
10 They also estimated the earnings effect of option
expensing on each of the 600 companies. Figure 11.5
summarizes the effect on net income of considering
share-basedemployeecompensationasanexpenseonfirms
indifferentsectorsoftheS&P500.Theeffectwasgreatestat
technology companies, where the cumulative cost of
share-basedcompensation wouldhave amounted to $15.43
billionin2004,representing 34 percentoftheunadjustednet