Stock Options Backdating - Explained
What is Stock Option Backdating?
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Table of ContentsWhat is Stock Option Backdating?Why Backdate Stock Options?Enforcement of Restrictions on Backdating Stock Options Academic Research on Stock Option Backdating
What is Stock Option Backdating?
Backdating Stock Options is a way of rewarding employees with options that are In the Money (ITM) and hence of immediate value. The option is awarded with a time stamp that predates the actual time of the option issue. The difference in the value of an option on the actual date it is issued vs. its value on the backdate, is the profit the holder is entitled to.
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Why Backdate Stock Options?
The Securities and Exchange Commission (SEC) previously only required companies to declare the number of options issued within two months of issuing the options. Companies began the practice of issuing backdated options within a 2 months duration, with the lowest performing date of the option being chosen as the date of issue. The SEC would be reported of this stock option issue dated at the lowest price in the preceding two months. The SEC changed the rules regarding the reporting of stock option issuing with the Sarbanes-Oxley legislation. Companies now need to inform the SEC within 2 business days of issuing stock options. This rule effectively put paid to the practice of Backdating Stock Options.
Enforcement of Restrictions on Backdating Stock Options
The immediate response to the ruling was weak. Companies chose to sidestep this dictat with various methods like citing complicated paperwork and other issues. Enforcement of the new rules was also lacking with no penalties being incurred by companies in violation of this legislation. The SEC then resorted to legal measures, suing companies found in violation of the Stock Options Backdating rules. A civil lawsuit against Trident Microsystems in 2010 was one such case. The case was settled out of court with the chief accused in the case neither confirming, nor denying SEC charges.
Academic Research on Stock Option Backdating
- Reputation and corporate social responsibility aberrations, trends, and hypocrisy: Reactions to firm choices in the stock option backdating scandal, Janney, J. J., & Gove, S. (2011). Journal of Management Studies, 48(7), 1562-1585. This paper explores the legal wranglings, ethical breaches, corporate social responsibility and reputations, in light of the scandals dealing with Stock Options Backdating.
- Unpacking backdating: Economic analysis and observations on the stock option scandal, Walker, D. I. (2007). BUL rev., 87, 561. This paper explores the economic angle of the practice of Stock Options Backdating.
- Taxes and the backdating of stock option exercise dates, Dhaliwal, D., Erickson, M., & Heitzman, S. (2009). Journal of Accounting and Economics, 47(1-2), 27-49. This paper explores the tax implications of backdating stock options.
- Executive turnover in the stock option backdating wave: The impact of social context, Wiersema, M. F., & Zhang, Y. (2013). Strategic Management Journal, 34(5), 590-609. This paper takes a look at the churn in executives boards of various firms during the Stock Options Backdating scandals.
- Discussion of The impact of the options backdating scandal on shareholders and Taxes and the backdating of stock option exercise dates, Armstrong, C. S., & Larcker, D. F. (2009). Journal of Accounting and Economics, 47(1-2), 50-58. This paper explores the impact of Stock Options Backdating on shareholders and its tax implications.
- Some observations on the stock option backdating scandal of 2006, Walker, D. (2006). This paper presents unique observations pertaining to the Stock Options Backdating scandals from the year 2006.
- Prosecuting Stock-Option Backdating: The Ethics of Enforcement Techniques, Jayaratnam, A. (2007). Geo. J. Legal Ethics, 20, 755. This paper sheds light on the various legal enforcement techniques and their ethical implications in prosecuting Stock Options Backdating firms.
- The shareholder derivative suit as a response to stock option backdating, Abbott, C. L. (2008). Louis ULJ, 53, 593. This paper takes a look at the Shareholder suit in response to Brocade Communications Systems Incorporateds employee Stock Option Backdating scandal.
- Stock Option Backdating: The Scandal, the Misconception & (and) the Legal Consequences, Nowicki, J. R. (2008). John's J. Legal Comment., 23, 251. This paper sheds light on the various legal, social, and ethical fallouts of Stock Options Backdating.
- Last Ditch Options: An Assessment of Independent Director Liability and a Proposal for Congressional Action in Light of the Employee Stock Option Backdating , Chambers, M. S. (2007). Ga. L. Rev., 42, 569. This paper takes a look at the liability of independent directors in employee Stock Option Backdating fiascos and proposes congressional action in its wake.
- What drives executive stock option backdating?, Veld, C., & Wu, B. H. (2014). Journal of Business Finance & Accounting, 41(7-8), 1042-1070. This study tries to decipher the motives behind the practice of corporate Stock Options Backdating.