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Backdating

Backdating. Backdating appears to have been a widespread practice in the United States A company might take the decision to issue at-the-money options on April 30 when the stock price is $50 and then backdate the grant date to April 3 when the stock price is $42 Why would they do this?.

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Backdating

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  1. Backdating • Backdating appears to have been a widespread practice in the United States • A company might take the decision to issue at-the-money options on April 30 when the stock price is $50 and then backdate the grant date to April 3 when the stock price is $42 • Why would they do this?

  2. Academic Research Exposed Backdating (See Eric Lie’s web site: www.biz.uiowa.edu/faculty/elie/backdating.htm

  3. Backdating • Proposed by Erik Lie (2005) in his study • dates on which options are granted to executives are chosen with the benefit of hindsight to be past dates when the stock price was particularly low • SEC investigated the issue, big time • Included Jack Welch, GE and Donald Tyson, Tyson Food • Silicon Valley firms (30-40)

  4. Backdating • Lynn Turner, a former SEC chief accountant, suspects it's a fairly common practice and ‘bigger than most people realize.’ Adds a Silicon Valley lawyer who asked not to be named: ‘I’d be surprised if there was even one public tech company that did not employ this practice in those [bubble] years.” • Randall and Erik Lie, 2005

  5. Outlook for ESO • Loopholes still exist • Decreasing trend due to changing accounting requirements • Among the S&P 500 companies, stock option grants dropped 26% in 2005 • Substitutes: Restricted Stocks • In 2005 the S&P 500 companies increased such awards by 44%

  6. Recent trends in executive compensation Figure source: http://www.equilar.com/newsletter/september_2006/ect_sept_2006_article2.html

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