Wednesday, August 30, 2006

Option Expensing - I told you so.....

In the previous post, I talked about the possibility that the new rules about options expensing would result in more opportunities for clever CFOs to manipulate earnings. It seems I was wrong; companies actually manipulated earnings in anticipation of option expensing:

In preparing for adopting the new rule and to lower future stock-option expense amounts reported in the income statement, some companies accelerated the vesting of employee stock options, typically those that were out of the money or "underwater." We identify 900 companies with a median market capitalization of $251 million employing this strategy. This is an increase of 151 companies with a median market capitalization of $276 million over those identified in our January 2006 report. We estimate over $8 billion of future stock-option expense has entirely vanished from future income-statement recognition as a consequence of stock-option-vesting acceleration.

In our view, for companies granting a similar dollar value of options and/or restricted stock in 2006 compared to historical amounts, there is a greater likelihood that option-vesting acceleration was used as a means to temporarily benefit reported earnings.

That's from a Bear Stearns study as reported in Barron's. Click on the title to read the entire article.

Does anyone really believe that companies won't find a way to manipulate option grants and expenses to benefit future earnings?

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