Stock Options: Old Game, New Tricks

Business Week looks at the game of stock options accounting. One of the variables of the Black-Scholes pricing formula is volatility. Now that companies have to account for employee stock options, their volatility assumptions are magically falling:

Time Warner’s lowering of its expected volatility in 2004 cut its options expense by $72 million, a 28% drop, according to New Constructs. Wireless service provider Nextel Partners slashed estimated options expenses from $41 million to $33 million. A Time Warner spokeswoman says the new calculation accurately reflects the more stable range in which the company’s stock now trades. Nextel Partners declined to comment.
Another tactic hundreds of companies have used is accelerated vesting. Options traditionally become effective over a period of years after they’re granted and are canceled if the recipient leaves the company. By making options vest in 2005 rather than in future years, companies can bury the cost in the footnotes of their 2005 paperwork. That boosts earnings in 2006 and beyond.
The number of companies employing the practice has almost doubled since midyear, from 234 in July to 439 by late November, according to Bear Stearns. The activity has slashed $4 billion from expenses for 2006 and later years. Senyek of Bear Stearns projects that 600 companies could speed up vesting by the end of 2005, boosting future profits by over $5 billion.

Posted by on December 12th, 2005 at 11:29 am


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