Stock option

A Stock Option is the right to buy shares of stock in a corporation at a fixed price. Stock options are often offered to key executives as part of package of executive compensation expecially by American business corporations.

Because stock prices are related to corporate earning, the granting of stock options to the top executives of companies gives an executive an incentive to increase earnings, either in reality or as the result of cooking the books.

It is estimated that over-reporting of income by an average of 25% by American corporations was one cause of the Stock Market Crash of 2002.