Investors May Now Eye Costs of Stock Options
New York Times (08/29/00) Vol. 104, No. 34 p.C1; Morgenson, Gretchen

The stock options that companies give to executives and workers are generally not accounted for as an employee expense. By not including the stock options, companies give their earnings a false boost. While the stock market continued to climb, investors were satisfied, but now, as the stock market flattens out, investors might begin to realize just how much stock option programs have lowered earnings. According to a study on the earnings of Standard & Poor's 500 companies, the net income of these companies would have been 6 percent below what it was in 1999 if stock options had been accounted for as an expense. The study, conducted by Pat McConnell, a senior managing director and head of the accounting and tax group in equity research at Bear Stearns, found that out of the 500 companies, only two companies accounted for options as a cost. Companies in the health care services business would have shown a 38 percent decline in earnings last year, while computer networking businesses' earning decline would have been 24 percent. Earnings at 21 companies would have dropped by more than 50 percent if stock options had been considered an employee expense, and 12 companies that had an operating profit in 1999 would have actually had an operating loss. McConnell believes the impact of not including options on earnings will grow in the next few years, but whether accounting rules will change to reflect the true cost of options has yet to be determined. McConnell said, "I think in three to five years, if standard setters outside the U.S. adopt a fair-value approach for employee stock options, then I think the U.S. will have to take another look at this."

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