Re: Share options and executive pay

["Lisa Murray" <allilapp@xxxxxxxxx>]

----- Original Message -----
From: "Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>
To: "pen-l" <pen-l@xxxxxxxxxxxxxxxxxxx>
Sent: Saturday, May 18, 2002 5:50 PM
>Subject: [PEN-L:26072] Share options and executive pay


Economist.com

Share options and executive pay

Coming clean on stock options

Apr 25th 2002 | NEW YORK
>From The Economist print edition

A more interesting argument is that the theory of efficient financial
markets does away with the need to expense options. Efficient-market theory,
at the heart of so-called modern financial economics, argues that a share
price accurately reflects all available information relevant to the value of
a company. Thus, provided all the information necessary to calculate a
firm's true profits is disclosed, it does not matter what the firm reports
as its profits. Even if a firm ignores the cost of options when calculating
its profits, the market will not.
One problem is that economists have identified weaknesses in the
efficient-market theory. Arbitrage does not work as it should. Investors who
know the true value of a share do not necessarily drive out investors who
are ignorant. The psychological biases of investors appear to affect share
prices. Markets, in other words, are not truly efficient-and shareholders
may be misled by reported profits that exclude the cost of options.

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Is there *any* non-circular definition of efficiency as applied to the
various markets that exist under actually existing capitalism? Daniel
Bromley has tried to identify them and has, like a good institutionalist
would, failed to find one. So why the persistence of the concept?

Ian