Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
¶ … employee stock option pricing is effected by the bonus plan hypotheses as discussed in the Watts and Zimmerman article.
Employee stock option pricing is an option on the common stock of a company that is issued as a form of non-cash compensation. Restrictions on the option (as for instance vesting and limited transferability) are ways in which the business attempts to align its own interests with those of the holder's interests. In the event of the company's stock rising, holders of options generally experience a direct financial benefit, which gives employees the incentive to behave in ways that will boost the company's stock price (Summa; web).
The management compensation hypothesis, otherwise known as the Bonus plan hypothesis accordingly states that managers whose incentives are tied up with the firm's accounting performance are more likely to use accounting choices that reduce reported profits and manipulate their accounting methods and records in particular ways in order to show more profits and...
An example that Watts and Zimmerman provide is that of managers choosing to use different deprecation methods that show lower profits at the start and higher profits towards the end. Similarly, some managers may ignore research and development costs since it will lower their current year profits that will, in turn, affect their income.
Watts and Zimmerman talk about positive accounting theory that is the model where empirical finance methods were used for financial accounting. Modern positive accounting gave rise to explanatory factors for various phenomena, one of which can be applied to explaining how employee stock option pricing is effected by the bonus plan hypothesis.
By using an empirical account, positive accounting theory focuses on the contractual view of the firm. The firm is perceived as the 'nexus of contracts' and the company uses accounting as one tool to facilitate its performance of contracts for the greater advantage of its firm. As Watts and…
Reference
Summa, J. employee stock options. Investopedia.
www.investopedia.com/university/employee-stock-options-eso/eso3.asp
Watts, R. L & Zimmerman, J.L,"Towards a positive theory of the determination of accounting standards" The Accounting Review, January 1978, pp 112-34.
Stock Options Payment of stratospheric compensations to the corporate executives by the dot.com companies is the talk of the day. It is pertinent to note that these compensations are paid not only in terms of the cash compensations but also in terms of stock options. However, compensations plans in terms of stock options are not new and being used years together in order to attract the employees and retain with a
Employee Stock Ownership on Employees in the Airlines Industry since September 11th. Review current materials on the issue. Airline industry ESOPs tend to be very volatile. This paper will examine the effects of the September 11th tragedy on employees' employee stock ownership plans in the airlines industry. The following generic information is provided for background before examining the main issue for this paper. In the United States, the main vehicle for employee ownership
.....company would expense the 1000 share options at $15 (1000 x $15 = $15,000), as this was fair market value at the time of expense, based on Black-Scholes (Harper, 2017). In 2014, the expense would be $3 per share option (1000 x $3 = $3,000), because that is the amount of increase in the value of the options that derives from the change in the exercise price. The accounting for the
The main fundamentals behind this growth strategy were favorably exploited by Symantec's CEOs in the recent years. For example, answering the question 'Why is Symantec's strategy to become a full service security company while others in the market are just focusing on single areas for future development, such as antivirus?' Of a journalist, Symantec's chairman and CEO John W. Thompson, answered: 'Look at some of the market leaders from a
Food Capital Budgeting Strategy for Price Elasticity Major effects of government policies on production and employment Government Regulations for fairness in the low-calorie, frozen microwavable food industry Major Complexities in Expansion via Capital Projects & Key Actions Convergence between the Interests of Stockholders and Managers Strategy for Price Elasticity The Price Elasticity is a tool that is used by economists and business to measure exactly the quantity response that is needed to adjust to a change in
Consolidation of Financial Statement Analysis In the wake of the Enron collapse, the chairman of the Securities Exchange Commission (SEC) repeated his calls for the nation's securities laws to be updated in an effort to avoid another such case. In an article in December 11, 2001's Wall Street Journal, Harvey Pitt wrote that the Enron collapse underscores the need to update and improve the nation's financial reporting and disclosure laws that