Effect of backdating

The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.

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

Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.

An example illustrates the potential benefit of backdating to the recipient.

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.

Search for effect of backdating:

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The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.

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