Could Google's Options Experiment Open Door To Reform Of Accounting Rules?
from the ch-ch-ch-changes dept
The move towards valuing employee stock options using Black-Scholes hasn't had the calamitous effect on the tech industry that some predicted, but there's still a lot of doubt as to whether the method is the best one for meaningfully conveying the cost of options to investors. Last year, Cisco proposed a market-based approach for valuing options, in hopes of arriving at a more accurate number than Black-Scholes. The SEC rejected the idea, but appreciated the spirit of the proposal, and noted that such a system, if constructed properly, might be worthwhile. Today Google announced that it would set up a new program to allow its employees to sell their stock options early to institutional traders. The idea is that for the employees it may help them realize their value earlier, while the traders may wish to buy them for hedging purposes. The plan doesn't specifically revolve around the issue of expensing, but it's easy to see it going down this road. Once trading commences, it will be easy to see whether the prices align with what Black-Scholes would predict. Or, if there's a major divergence, then it might call into question the use of Black-Scholes for this purpose. Another possibility is that Google could report two sets of numbers, one calculating options based on Black-Scholes and the other based on the cost derived from this market. Because neither method has any real bearing on the company's operations, the choice of which numbers to accept could simply be left up to the investing public.