NCPA - National Center for Policy Analysis

Some Firms Experience Little Pain By Expensing Stock Options

August 9, 2002

In the past few weeks, 43 companies have announced they will start subtracting the cost of stock options from earnings. In most cases, those companies issue few stock options, so the cost to them is small.

  • A USA Today analysis found that the 43 companies' earnings would be only 4.2 percent lower as a group if they had expensed options last year.
  • That's far lower than the 20 percent hit to earnings that companies in the Standard & Poor's 500 would suffer on average if all counted stock options as an expense, according to Bear Stearns.
  • Technology firms are particularly reluctant to expense options since many of them are start-ups and use options as part of compensation in their early years in order to conserve cash.
  • Intel's earnings would have been 79 percent lower last year if it had expensed options -- and Cisco's loss would have been nearly three times as large.

By contrast, General Electric's earnings would have been just 2.9 percent lower.

Source: Matt Krantz, "Firms Expensing Options Aren't Taking Huge Hit," USA Today, August 9, 2002.

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