The options backdating
The options backdating - speed dating dorset uk
There is also some relatively early anecdotal evidence of backdating.A particularly interesting example is that of Micrel Inc.
In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.
The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.
To the extent that companies comply with this new regulation, backdating should be greatly curbed.
Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.
(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.
This made me think about the possibility that some of the grants had been backdated.
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.
However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.
Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient.
In particular, he found that stock prices tend to increase shortly after the grants.