Stock option expense: The sword of Damocles revealed

More than five years have passed since SFAS No. 123 first required firms to either recognize or disclose stock option expense based on the fair value of options granted. This study examines the effect of stock option expense on the diluted earnings per share and return on assets of 100 firms identified by Fortune magazine as "America's Fastest-Growing Companies." It is found that stock option expense has a material impact on the performance measures for a majority of the sample firms. Moreover, the analysis predicts stock option expense will grow over the next several years, potentially doubling in magnitude during that time. The paper also documents some noncompliance with the disclosure requirements of SFAS No. 123, finding that 12 percent of the sample firms provided incomplete information during the most recent year examined.