Option back dating datingsecrettips com
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.For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.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.
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.
Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.
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.
There is also some relatively early anecdotal evidence of backdating.
A particularly interesting example is that of Micrel Inc.
The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.