Chinese Accounting for Stock Options

Research Report

Chinese Accounting for Stock Options

August 30, 2004

Abstract

For a long time I have tried to remain open on the issue of valuing stock options. I know that despite modern finance theory they can be hard to value perfectly, due mainly to their unusual and asymmetric risk structure and lack of open trading in the market. I have listened patiently to all the arguments of start-up companies who complain that it is somehow harder to give restricted stock than stock options to their executives. I know that valuation for financial purposes and for tax purposes are not exactly the same policy issue. Still, none of this offsets my fundamental distaste for accounting badly for income, a distaste that derives in no small part from my experience with Chinese accounting as it had evolved in the 1960s and even the 1970s.

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