How backdating

However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.

Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.

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This is the granted option that would be reported to the SEC.

The act of options backdating has become much more difficult as companies are now required to report the granting of options to the SEC within two business days.

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.

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

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.

Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.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.Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.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.Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).An example illustrates the potential benefit of backdating to the recipient.

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