This study examines the usefulness of employee stock option disclosures in pricing firms. We conjecture that employee stock option grants result in better alignment of employees' interests with those of shareholders, creating higher future earnings (incentive effect), but that the future earnings should be shared between shareholders and option holders (dilutive effect). Consistent with our predictions, we find that innovations in the Black Scholes value of option grants are positively related to contemporaneous stock returns and that the number of outstanding options is negatively related to the magnitude of the earnings response coefficients. We also provide evidence that earnings per share, both basic and fully diluted, have little explanatory power for contemporaneous stock returns for firms with high levels of options outstanding. Further, the results show that firms with a larger number of options outstanding generate higher future accounting returns. Overall, the evidence suggests that information disclosures concerning employee stock options are potentially relevant and useful to investors.