What is backdating stock options

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

Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient.Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date (when backdating still might work), and for longer periods for the minority of grants that violate the two-day reporting requirements.We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants.There is also some relatively early anecdotal evidence of backdating.A particularly interesting example is that of Micrel Inc.

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