The Dangers Of Options Backdating

This is the granted option that would be reported to the SEC. In particular, he found that stock prices tend to increase shortly after the grants. 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. In others, the costs may be in the tens or even hundreds of millions of dollars. The collective evidence suggests that these practices play a minor role in explaining the aggregate stock returns around grants.

Options backdating is the process of granting an option that is dated prior to the actual issuances of the option. In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date.

DEFINITION of 'Options Backdating'

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BREAKING DOWN 'Options Backdating'

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. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of . 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. This means they must wait for the stock to appreciate before making any money. Overview of options backdating scandals. Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management. However, in late and early , the issue of stock options backdating gained a wider audience.