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But What Does Myron Scholes Know About Options?
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Posted by: Jack Ciesielski 5/19/2005 5:55 AM
A lot more than most of us, I think it's fair to say. (And I'd be happy to admit it, too.)

Remember the Cisco system for divining dubious values on employee stock options? The one they've put on the SEC's plate for vetting? Then read this article from Dow Jones Newswires by way of CNNMoney: "Stock-Option Guru Scholes Doubtful On Cisco Value Plan."

Mr. Scholes' comments are straight out of Econ 101, (see: supply & demand). "In order to bring "a very idiosyncratic contract to the market," he said, it would have to be sold at a discount "in order to encourage the market to take it."

While Cisco is billing the alternative market price as an attempt to find an "accurate" valuation for stock-option expensing, Scholes said the market auction proposal is one that by its nature will not draw a true price. For one thing, a small market placement and little liquidity means the issue would likely sell at a discount...the outsider with less information [than Cisco] would pay less for such an instrument than the cost to Cisco." [Emphasis added.]

Sounds sensible. Mr. Scholes makes some sound points about the robustness of the market for these instruments; I would have liked to know what he thought about the "option on an option aspect" of the instruments as well, but the interview or the article didn't go there. We'll have to wait and see if the SEC reaches the same conclusions as he does.


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