Back dating of stock option

Backdating does not violate shareholder-approved option plans.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.

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).The media attention that options backdating has received has also played a roll in discouraging future backdating.However, such measures will not prevent further commissions of other types of corporate fraud, except to the extent to which they increase the perceived or actual consequences to fraud.

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