Study Of Executive Stock Option Accounting And Financial Problems

As one of the most effective incentive methods, Executive Stock Options (ESOs) was introduced to China in the 1990s, and was used in several listed companies and high-tech companies. Being lack of related regulation to comply with, the accounting for ESOs in domestic is not normative. In addition, the stakeholders of companies are showing more interests in financial consequences of ESOs.The paper studies ESOs from the aspects of accounting and finance. On one hand, based on the analysis of recognition, measurement and disclosure of accounting for ESOs, the author makes several suggestions on the accounting process of executive stock options in China. On the other hand, after studies the financial effects of ESOs on net profits, Earnings per Common Share (EPS), financial leverage and stakeholders, the author draws several conclusions as follows: The firm's net profit will increase due to the incentive of stock options to managers and matches between different types of ESOs and accounting methods will have different effects on net profit. The net profit has a negative correlation with the size of ESOs; EPS of firm will be diluted with the use of ESOs and the degree of dilution has a positive correlation with stock price; As for the effects of ESOs on financial leverage, the degree of financial leverage (DFL) will increase, which leads to an increase of firm's financial risk. However, the effects on companies' business risk are not certain; Though there are both advantaged and disadvantaged financial effects on stakeholders including stockholders, managers, creditors, regulators and so on, the benefits of stakeholders will be balanced finally through their efforts and harmonization. In the end, the author studies the obstacles of implementing executive stock options in China and put forward several countermeasures.