Shibboleths and sympathy on stock option expensing

Holman Jenkins does a great job debunking some of the myths surrounding the expensing of stock options issue:

Here's another nonsensical shibboleth: Because there's no accounting charge, companies treat options as if they have no cost, dishing them out like water to piggy executives, according to one prominent newspaper's editorial page.

Uh huh. Companies that dish out stock options like water pay an extremely large cost in their share prices, precisely the currency in which piggy executives choose to reward themselves and demonstrate their value to shareholders. By now, you could insulate your attic with academic studies attesting to the fact that the market recognizes the dilution cost caused by option issuance. How could it be otherwise? We'd have to abandon any notion that the stock market assigns rational values to company shares. Indeed, we'd be wise to close the market down immediately as a menace to society's wealth.

Here's another canard: Both advocates and opponents of expensing say it will (and perhaps should) lead to a precipitous drop in share prices because companies will have to reduce their reported earnings to account for their issued options.

Again: You don't change the market's mind about a company by telling it something it already knows. Otherwise, we could all get rich by shorting the shares of every company that issues stock options and then waiting calmly for the new accounting rule to take effect. ...

Had all concerned shown the intelligent curiosity to ask, first of all, does the stock market recognize the dilution cost of stock options, many forests could have been saved and the net infusion of CO2 into the atmosphere from participants on all sides of the expensing debate would have been radically reduced. We wouldn't be expecting expensing to cure a sick business culture, fix the distribution of income or improve the quality of stock prices. ...

The only debate worth having is whether expensing is desirable on the accounting merits. Our view, for the record, is that it does little to illuminate the costs and benefits of a company's compensation policy, while merely junking up earnings with another highly abstract and contingent deduction.

Worse -- and here's where we sympathize with the saner sort of Silicon Valley executive -- so big will be the impact on the accounting statements of some smaller tech companies that deciding how to measure options expense will be tantamount to deciding how much earnings to report. No wonder Silicon Valley CEOs hate the idea, especially with their heads already on the Sarbanes-Oxley chopping block.