Finance And Accounting Of Stock Options Explained

The origin of stock option as a form of management compensation and incentive dates back to 1950s, and it has become an indispensable component of executive compensation contracts in Europe and America at the end of 1990s. But stock option turned to be a target of public criticizes overnight since the accounting frauds of Enron and WorldCom, and then the trend of its development is no longer so certain. Therefore, it's of practical significance to uncover the internal driving force of the development of stock option and to render a rational interpretation of the history of stock option from the viewpoint of finance and accounting, which is essential for providing guidance on Chinese corporations' development of stock option incentive system which is still in its rudimentary stage.In a financial perspective, the incentive effects of stock option may be interpreted in a principal-agent framework. The traditional thoughts of this issue are based on the principle of information content and optimal risk-sharing, but the contemporary view emphasizes interaction between the structure of corporate governance and the incentive effect of stock option. Thus, an investigation into the goal of enterprises, the structure of corporate governance and the contract of stock option provides some preliminary clues about the development of stock option.In an accounting perspective, many interest groups and complicated interests are concerned with stock option accounting. The recognition and measurement of the related cost, expense and equity is a kind of distribution of related interest on the one hand, and on the other hand may have a significance influence on financial report, in that improper accounting methods and information disclosure concerning stock option can mislead investors or be used by those corporations who have a defective corporate governance system to cheat investors with false financial information. Therefore, accounting for stock option to a great degree determines the acceptability of stock option by practitioners, and can have a subtle and far-reaching influence on the development of the whole economy.The aim of regulation related to stock option accounting is to coordinate the interest of different interest groups. The range and strength of accounting regulationresult from the dynamic games played by parts of special interest. Accounting regulation reform leads to adjustment of interest of related parts and will eventually affect the development of stock option, which provides another interpretation on the history of stock option.At the end of this thesis, after a brief review of the stock option practices of Chinese corporations and based on conclusions drawn from the theoretical analyses above, the author looks into the prospects of application of stock option incentive system by Chinese corporations.