Accounting treatment of employee stock options has been alleged to be a major reason for why so many options are granted to so many people. However, there is no systematic evidence on the relationship between accounting considerations and employee stock option grants. By analyzing employee stock option grants to CEOs, senior executives, and non-executive employees in 859 firms from 1996 to 2002, I show that concern about reported EPS affect option grants. Consistent with predictions from prospect theory, firms grant more options when doing so helps them meet one or more of the following three earnings targets: positive earnings, last year's earnings, and analyst forecasts. Consistent with research on mental accounting, firms grant more options when reported earnings are more sensitive to option grants.
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