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