Start Option back dating

Option back dating

To the extent that companies comply with this new regulation, backdating should be greatly curbed.

I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants.

Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.

We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants.

There is also some relatively early anecdotal evidence of backdating.

Backdating does not violate shareholder-approved option plans.

Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.

He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.

This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.

Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.

Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date (when backdating still might work), and for longer periods for the minority of grants that violate the two-day reporting requirements.

(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.