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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

An Unintended Consequence?
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Posted by: Jack Ciesielski 3/29/2006 7:00 AM
The SEC's chief economist, Chester Spatt, delivered a speech entitled "Financial Regulation: Economic Margins and Unintended Consequences" at the Washington Area Finance Conference at George Washington University on March 17.

He made some interesting points, maybe some that we've all noticed before. For instance, with regard to the 1993 cap that was placed on the tax-deductibility of non-contingent executive compensation over $1,000,000; however, "firms substituted alternative compensation in order to be able to pay prospective employees their equilibrium compensation level. One could argue that an "unintended" consequence of such legislation was to increase executive compensation."

He wonders about the possible "unintended consequence" of stock options expensing:

"Because of the efficiency of our financial markets, I would not expect options expensing to lead to substantial changes in the valuation of companies that have significant option programs. However, one potential impact from options expensing and arguably an "unintended effect" may be to moderate the use of these grants in compensation programs by educating boards of directors as to the potential ex ante cost to these grants and removing the natural bias in favor of a compensation tool that was not reflected previously on the profit and loss statement."

Surely there will be some definitive academic study on the before-and-after prevalence of U.S. stock option grants once all companies are reporting on the same basis. (And that's still going to take some time.) For now, the anecdotal evidence - or at least the conventional wisdom - points to that unintended consequence: options grants are widely believed to be declining, in favor of more awards of restricted stock.
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