Definition of backdating stock options

08-Jun-2016 20:38 by 5 Comments

Definition of backdating stock options

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

A particularly interesting example is that of Micrel Inc.

Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).

By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.

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.

Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of

A particularly interesting example is that of Micrel Inc.Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.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.Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).

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A particularly interesting example is that of Micrel Inc.

Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).

By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.

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.

Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).

million (see Section 162(m) of the Internal Revenue Code).

However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.In particular, he found that stock prices tend to increase shortly after the grants.He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.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.In this article I explore the impact of the introduction of the Sarbanes–Oxley Act (SOX) in 2002 and the Securities and Exchange Commission's implementation of the Act in 2006 on the options granting process.

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