Markley on stock options and opportunity cost

Kyle, I think that


I think that opportunity costs can, in some cases, be accounted for, but in the case of stock and options, there is no opportunity cost.

If the CEO of Ford gives his wife a Ford Explorer, Ford has forgone the opportunity to sell it to a dealer. This seems to me to be an opportunity cost that should be accounted for, but the appropriate value to be assigned is the replacement cost, not the wholesale or retail price. This replacement cost perspective is also one way to look at why stock and options have an opportunity cost of zero.

Currently, stock grants are expensed and option grants are not, even though they are transitional forms of the same thing. In fact, neither should be expensed.

The supporters of expensing correctly perceive that a logical fault exists and want to enter an expense so that companies cannot use equity compensation without any visible penalty. However, their purported solution is simply wrong and extremely counter productive.

It is not the granting of stock or options that is a real expense, but rather the repurchasing of shares to mask dilution of shareholder ownership.

See the url below for a complete description --

Regards, Don