Abstract The article applies the Financial Accounting Standards Board (FASB)'s proposal to a random sample of firms that granted stock options in order to assess the impact of the related compensation expense on operating income in the United States. Under existing generally accepted accounting principles, no compensation expense is recorded for executive stock options (ESOs) if the exercise price on the date of grant is equal to the market price of the stock. Similarly, only negligible compensation expense tends to be recorded if the exercise price on the date of grant is less than the market price of the stock. The inadequacy of this method has led the FASB to consider a proposal to measure compensation related to grants of ESOs at their fair values, with a lower bound constraint. It would seem natural to use the continuous-dividend version of the B-S model for firms that pay cash dividends and the no-dividend version for firms that do not pay dividends. The latest FASB proposal requires that stock option compensation be measured as of the vesting date, as opposed to the date of grant.
Foster et al. (Mon,) studied this question.