Video about backdating of executive stock options:
What Are Stock Options? - What Is A Stock Option?
However, in late and early , the issue of stock options backdating gained a wider audience. An example illustrates the potential benefit of backdating to the recipient. It also provides investors with timely access to grant pricing information. However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions. Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley. This fraction was roughly halved as a result of the new two-day reporting requirement that took effect in August In a study that I started in and disseminated in the first half of and that was published in Management Science in May available at http: The Enforcement Perspective", https: Thus, such news announcements do not necessarily imply spring-loading. Share Do you ever wish that you could turn back the hands of time? However, under the new FAS R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed. He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.
In addition, the company must also properly account for the expense of the options grant in their financials. Although it may appear shady, public companies can typically issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program. In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead. An example illustrates the potential benefit of backdating to the recipient. A WSJ article published on May 5, available here summarized some of these events and discussed some of the effects on shareholders' value. Although many companies have been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum. It has also been the subject of a civil and a criminal complaint. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued. However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant s as an expense against earnings. In order to lock in a profit on day one of an options grant, some executives simply backdate set the date to an earlier time than the actual grant date the exercise price of the options to a date when the stock was trading at a lower level. Therefore, any criminal prosecution is likely to be based on option grants made before Sarbanes-Oxley took effect, and the deadline facing the government for bringing those prosecutions has already passed. Annual and quarterly reports filed by the company did not include the compensation costs that stemmed from the options backdating incidents. That is, they grant their executives stock options with an exercise price or price at which the employee can purchase the common stock at a later date equivalent to the market price at the time of the option grant. By the end of the s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase. Backdating is properly reflected in taxes. Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. Clearly, for those who own shares in companies that don't play by the rules, options backdating poses serious risks. Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules. Share Do you ever wish that you could turn back the hands of time? Because the company was unable to restate the earning to account for the option backdating in a timely manner and delayed other filings of earnings with the SEC, its shares were delisted in the beginning of This is the granted option that would be reported to the SEC. Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation. Third, firms might have concealed any traces of backdating by not choosing the absolute lowest price for the look-back period or by only backdating some of the grants. Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley. On the surface - at least compared to some of the other shenanigans executives have been accused of in the past - the options backdating scandal seems relatively innocuous.
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