A note on "equilibrium warrant pricing models and accounting for executive stock options"

Article Abstract:

E. Noreen and M. Wolfson presented and tested two models for the valuing of warrants. The models are essentially options price models adjusted for the dilution factor that emanates from the increase in the number of outstanding shares as a result of the potential exercise of warrants. A comparison of the estimated values of warrants based on the models and the actual prices of the warrants uniformly produces negative means errors. Two errors were committed in applying the models to actual market data that led to underestimation of estimated warrant prices. The standard deviation for the time series of the rate of return of the stock is underestimated due to the effect of the potential dilution on the stock itself. The second error is that there is no need for a specific dilution adjustment due to the fact that the stock price should reflect the potential dilution.

Prices and rates, Stocks, Stock prices, Stock warrants, Noreen, E., Wolfson, M.

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Economic consequences of accounting for stock-based compensation

Article Abstract:

Three complementary research methods are used to evaluate the nature and range of the predicted economic consequences of accounting for stock-based compensation. First, the properties of firms lobbying against the Financial Accounting Standards Board's 1993 Exposure Draft are analyzed. Then, the properties of firms using employee stock options under the original financial reporting rules are investigated. Finally, stock price reactions to announcements related to the new financial reporting rules are examined. The results support the hypothesis that opposition to expensing of stock options is attributed to concerns over potential costs brought about by news of higher levels of top-executive compensation.

Accounting and auditing, Stock options, Wages, Wages and salaries

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An approach to transfer pricing under uncertainty

Article Abstract:

Agency theory is used to gather insights into the issues of decentralization and transfer pricing. Transfer pricing allows an optimal decision on the production quantity in a decentralized setting and establishes proper incentives for the agent. The current research considered the delegation of a production decision to an agent by a principal who wishes to induce proper decisions through proper compensation. Results show that the optimal transfer pricing function reflects a typical demand curve and is a downward sloping function.

Management, Transfer pricing, Uncertainty, Decentralization (Management)

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