The cost of employee stock option compensation is borne by shareholders through significant dilution.

Test: as of 2001, existing shareholders bore the economic cost of employee stock option compensation through dilution (or through buybacks made to offset it), and that dilution was significant. - True: accounting or finance literature and company data from around 2001 show that option grants and exercises transfer value from existing shareholders by raising share counts (or by forcing offsetting buybacks), and that the effect was material at many companies, e.g. option overhang or annual dilution of several percent at typical large firms, especially technology firms. - Mostly true: the cost is shown to fall on shareholders, but 'significant' holds only for a substantial subset of firms (such as technology firms) rather than generally. - Mixed: the evidence is evenly split on whether the dilution was material. - Mostly false: shareholders bear some cost, but the evidence shows dilution was typically small or immaterial, so the claim overstates it. - False: the evidence shows shareholders do not bear the cost of option compensation.

Set before the research began.

1. E1 Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns Board of Governors of the Federal Reserve System (J. Nellie Liang and Steven A. Sharpe) · November 1999

   “Shown in row (5), this cost has tripled as a fraction of firm value, from 0.25 percent of market value in 1994 to 0.74 percent in 1998.”

2. E2 Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play? Board of Governors of the Federal Reserve System (Scott J. Weisbenner) · April 2000

   “Analysis of panel data for a sample of large firms suggests that firms conduct an ongoing repurchase of shares over the life of an option that undoes much of the dilution to EPS that results from past stock option grants.”

3. E3 Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play? Board of Governors of the Federal Reserve System (Scott J. Weisbenner) · April 2000

   “Granted, the potential dilution resulting from stock option programs may be slight for many firms.”

4. E4 The Controversy Continues The CPA Journal (New York State Society of CPAs)

   “Nevertheless, stock options dilute earnings, meaning that they are not free to shareholders.”

E4 states that stock options dilute earnings and are not free to shareholders. E2 finds that large firms buy back shares over the life of an option to undo much of the dilution, so either way the cost falls on shareholders. On whether the dilution was significant, the evidence points both ways. E1 reports that a cost tripled to 0.74 percent of market value by 1998, though the quote does not say exactly which cost it measures. E3, a Federal Reserve paper, says potential dilution may be slight for many firms. No item shows the several-percent dilution at typical large firms that the criteria require for true.