Fasb backdating stock options

20-Apr-2015 11:11 by 4 Comments

Fasb backdating stock options

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.

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.

Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.

Instead, she decided to risk criminal prosecution by blowing the whistle.

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.

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

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).

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

This made me think about the possibility that some of the grants had been backdated.

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.

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

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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).However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.This made me think about the possibility that some of the grants had been backdated.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.The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.

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.This made me think about the possibility that some of the grants had been backdated.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.The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.

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