SEC Defuses Cisco's Option Pricing Grenade: Tosses Own Grenade Back
from the let-the-market-decide dept
We’ve been following the debate over whether or not companies should expense options for a while now — and have always felt that both sides were exaggerating a bit. Those in favor of expensing options were fooling themselves that expensing them would be accurate (it would still be something of a made up number for many companies) and those who were against it were overreacting to the idea that it would harm how Wall Street viewed companies. Any Wall Street analyst worth his or her expensive suit would know enough to adjust for the differences, and there would be enough pro forma results that people would be able to better compare apples to apples. However, back in May, Cisco tossed something of a hand grenade into the debate, asking the SEC if they could sell derivatives based on their options, creating a real market that they could use to base the “real market price” for their options on. That, certainly, would be a much more accurate means of figuring out how much the options were really worth — though some people claimed it was just Cisco’s way of valuing options lower than what Black-Scholes would say. The SEC came back and turned down Cisco, but did so in a fairly constructive way. Basically, they point out why they think Cisco’s specific plan wouldn’t accurately value the options, and suggest their own market-based method of valuing options that does sound even more accurate. Basically, the SEC tries to take into account the limitations on employee options, including the fact that employees may leave options on the table by leaving a job before they vest. So, their suggestion is basically a “shadow market” for the options, where investors risk losing options if employees leave too early as well, though they’re also open to other suggestions for accurate market-based measures. It’s quite fascinating to see them trying to come up with more accurate means of valuing the options, but you have to wonder if there are unintended consequences of such “markets” as well — including pressure on employees to act in certain ways to influence that market as well.