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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.
Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.
(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.
The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.
To the extent that companies comply with this new regulation, backdating should be greatly curbed.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.