Market valuation and employee stock options;

This paper investigates a market-valuation-based hypothesis for employee stock options (ESOs). It examines how market valuation has affected the decision to grant ESOs, the amount of options granted, and the distribution of options among executives and rankand- file employees. I find strong empirical evidence that firms with high market valuation and high probability of future overvaluation are more likely to adopt ESOs and grant more options to their employees. Furthermore, when top executives perceive that the current market valuation is high, they grant a smaller portion of options to themselves relative to rank-and-file employees. All these results are consistent with the market-valuation rationale for ESOs, which argues that firms use ESOs as a method to sell overvalued equity

Heterogeneous beliefs and employee stock options;

This paper uses a market valuation model to explore why firms grant employee stock options. When insider managers and outside investors have different opinions about the future prospects of the firm, employee stock options can be used to capture future investor overvaluation and to save employee compensation costs. Options can enhance the stock value for existing shareholders if the difference in opinion is highly volatile. The equilibrium option grant is positively correlated with both the perception error of investors, and the volatility of this error, as well as the correlation between investors 19 error and firm fundamental value. The model provides implications on the cross-sectional differences in option grants, and these implications can be examined empirically

An Alternative Method Of Accounting For Stock Options

Currently, the grant date fair value of employee stock options is expensed over the vesting period. Our study introduces a new valuation approach for stock options and examines the impact of this change on earning per share (EPS) for a sample of firms over the period 2002-2011. The new valuation approach provides data useful to the Financial Accounting Standards Board (FASB) as it determines whether to revise the current option accounting rules. Under the proposed approach, options are valued at their intrinsic value on the grant date (i.e., the opportunity cost or the economic promise associated with the difference between the exercise price of the option and the market price of the stock at each measurement date) and further revalued each reporting date until the options are exercised

Kvalificerade personaloptioner - Utmärkta för de unga företagen?

In 2017, the Parliament of Sweden enacted a new set of rules in the Income Tax Act (sw: Inkomstskattelagen (1999:1229)) regarding the taxation of certain employee stock options (sw: personaloptioner), which came into force on January 1, 2018. These rules created a new category of employee stock options called qualified employee stock options. These new options are not taxable benefits when the market value of the instrument exceeds the remuneration the employee/option holder has paid to obtain it, in contrast to other securities (sw. värdepapper) and employee stock options. However, the options are not completely exempt from tax, instead they are subject to capital gains tax when the underlying asset is sold. In order to be exempt from labour taxation when the option is acquired or exercised, an option has to fulfil legal requirements in order to be a qualified employee stock option. The purpose of this essay is to examine what constitutes a qualified employee stock option, by examining the delimitation between securities and employee stock options as well as examining the legal requirements an employee stock option must fulfil in order to be qualified, focusing on the rules of valuation and the rule on maximum ownership in the issuing company. The essay also analyses whether or not the new rules are compatible with the principles of equality and neutrality, two key principles in Swedish tax law in light of the purpose of the new rules. The delimitation between securities and employee stock option differs depending on whether the option is a warrant (sw. teckningsoption) or a call option (sw. köpoption). Warrants keep their status as securities if the holder is able to realize a value equal to or exceeding the cost of the warrant, whereas call options lose their status as securities if the holder is not able to receive at least the market value of the option. The new set of rules do not change how the delimitation is made, but they have brought the term “employee stock options” into the letter of the law. The rules of valuation of qualified employee stock options in Chapter 11 a, Section 13 of the Income Tax Act facilitate the valuation of these options in comparison to the valuation of other securities and employee stock options, as there are exact rules on how to value such options, thus avoiding the problems facing valuation of assets that are not publicly-traded. The rules focus on the circumstances when the qualified employee stock option is acquired, thus enabling the employee/option holder to predict the future taxation of exercising the option. The same conclusion can be made about the rules regarding maximum ownership in the company that has issued the employee stock option. Lastly, the new rules are not in accordance with the principles of equality and neutrality as they treat both different people and different types of income differently. However, as the new rules serve their purpose, I conclude that they are a reasonable deviation from the aforementioned principles, although different valuation of different qualified employee stock options is not motivated. In addition to this, I also find that the distinction between securities and employee stock options should clarified, in order for the new rules to fully fulfil their purpose.1 januari 2018 trädde nya regler om beskattning av vissa personaloptioner ikraft. Dessa regler innebär att den förmånsbeskattning som sker vid förvärv av personaloptioner på förmånliga grunder på grund av anställning inte ska ske, om en rad villkor är uppfyllda. Dessa kvalificerade personaloptioner är dock inte helt skattebefriade, då eventuell kapitalvinst på de underliggande andelar som optionsinnehavaren har förvärvat vid utnyttjande av optionen kommer att kapitalvinstbeskattas enligt allmänna regler och eventuellt enligt fåmansföretagarreglerna. De nya reglerna står i centrum för detta arbete och arbetet syftar till att fastställa vad som konstituerar en kvalificerad personaloption genom att dels utreda gränsdragningen mellan värdepapper och personaloptioner, dels genom att studera de krav som uppställs för att en personaloption ska vara kvalificerad. I arbetet läggs särskilt fokus på villkor om värdering av kvalificerade personaloptioner och krav på maximal ägarandel i utgivande bolag. Dessutom analyseras de nya reglernas överensstämmelse med likformighets- och neutralitetsprinciperna och i vad mån reglerna är en ändamålsenlig avvikelse från dessa principer. Var gränsen går mellan värdepapper och personaloptioner skiljer sig åt baserat på vilken slags option gränsdragningen avser. Teckningsoptioner kan behäftas med mer omfattande förfoganderättsinskränkningar än köpoptioner. Teckningsoptioner behöver endast innebära att optionsinnehavaren trots förfoganderättsinskränkningarna har möjlighet att tillgodogöra sig ett värde motsvarande anskaffningsvärdet på teckningsoptionen för utgöra värdepapper, samtidigt som köpoptioner förlorar sin värdepappersstatus om förfoganderättsinskränkningar hindrar innehavaren från att tillgodogöra sig marknadsvärdet. De nya reglerna förändrar inte rättsläget i denna del, men sedan årsskiftet ingår begreppet ”personaloption” i lagtext till skillnad från tidigare. Reglerna om värdering i 11 a kap. 13 § IL innebär att värdering av kvalificerade personaloptioner förändras i jämförelse med värdering av optioner i allmänhet, då det finns lagstadgade hjälpregler i lagrummets andra stycke om hur marknadsvärdet på en kvalificerad personaloption ska räknas ut. De lagkrav som anknyter till värdering av optionerna utgår dessutom från omständigheterna vid förvärvet snarare än vid utnyttjande av optionen eller avyttring av de förvärvade andelarna, vilket medför förutsebarhet för optionsinnehavaren. Samma bedömning får anses gälla avseende kravet på maximal ägarandel i utgivande företag. De nya reglerna är inte förenliga med likformighets- och neutralitetsprinciperna, då reglerna leder till olikformig behandling av såväl olika skattskyldiga som olika slags inkomster. Reglerna får dock sägas uppfylla sitt syfte: att skapa förmånliga beskattningsregler för små, unga och innovativa företag och får således ses som en ändamålsenlig avvikelse från de båda principerna. Detta motiverar emellertid inte att kvalificerade personaloptioner från olika slags företag olikbehandlas. Regler kring vad som är ett värdepapper respektive en personaloption bör därtill förtydligas, då skatteregler som ämnar styra de skattskyldigas beteende bör vara mer förutsebara än de gällande reglerna för gränsdragning

New Data for Answering Old Questions Regarding Employee Stock Options

This paper is a description and summary of existing questions and sources of data on stock options with an emphasis on two issues; what are the issues surrounding stock options in the national accounts and what value do employees place on stock options? We survey many existing data sources and outline some of the ways these data can be used to answer questions about the use and impact of employee stock options. The data sources include administrative records from individual firms, survey data of employee perceptions, disclosure filings with the SEC and other government, nonprofit, and international sources. We explore ways to investigate the value of options to employees and their cost to the firms using data on employee exercise decisions. Finally, we discuss the implications of our findings for public policy, the reporting of stock options, and how options are considered in the national accounts

Share-Option Based Compensation Expense, Shareholder Returns and Financial Crisis

This paper contributes to the literature that analyses the relationship between Share-Option Based Compensation (SOBC) expense and shareholder returns. It utilises a sample of financial firms listed in the European Economic Area and Switzerland between 2005 and 2016 to make inferences about the impact of the financial crisis on the above-mentioned relationship. The paper also assesses the extent to which the relationship between SOBC expense and shareholder returns during the financial crisis varies with ownership concentration. We find evidence that the positive relationship between SOBC expense and shareholder returns is significantly more apparent during the financial crisis. This suggests that investors place more emphasis on the unrecognised intangible features of SOBC contracts during the crisis, even though their associated expenses are subject to managerial discretion and measurement errors. We also find that the positive relationship between SOBC expense and shareholder returns over the financial crisis is more pronounced when ownership is more concentrated. The results of our study are robust after controlling for firm size, potential investment growth opportunities, traditional banking activities and firm self-selection bias

Employee Stock Options: Tax Treatment and Tax Issues

[Excerpt] The practice of granting a company’s employees, officers, and directors options to purchase the company’s stock has become widespread among American businesses. According to Information Technology Associates, 15% to 20% of public companies offer stock options to employees as a part of their compensation package, and over 10 million employees receive them. During the technology company boom of the 1990s, they were especially important to start-up companies, allowing them to avoid paying large cash salaries to attract talent. Employee stock options have been extolled as innovative compensation plans benefitting companies, stockholders, and employees. They have been condemned as schemes to enrich insiders at the expense of ordinary stockholders and as tax avoidance devices. This report explains the tax treatment of various types of employee stock options recognized by the Internal Revenue Code, examines some of the issues that have arisen because of the real and perceived tax benefits accorded employee stock options, and describes key laws and regulations concerning stock options, and discusses the “book-tax” gap as it relates to stock options and S. 1375 (Ending Excessive Corporate Deductions for Stock Options Act)

Accounting for stock-based compensation: an extended clean surplus relation

Residual income valuation is based on the assumption that the clean surplus relation holds. As pointed out by Ohlson (2000), among others, the standard clean surplus relation is frequently violated. Moreover, standard residual income valuation models rest on the implicit assumption that future stated earnings belong to current shareholders only. This is clearly invalid for companies granting employee options. In order to overcome these deficiencies, this paper establishes an extension of the clean surplus relation and derives simple analytical solutions for the value of outstanding stocks in terms of already known accounting information. --Residual income valuation,clean surplus accounting,US-GAAP,employee stock option programs