Options backdating cases

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.We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants.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.(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.This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.In a study that I started in 2003 and disseminated in the first half of 2004 and that was published in Management Science in May 2005 (available at I found that stock prices also tend to decrease before the grants.

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

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.

ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.

Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.

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