Does backdating explain the stock price pattern

Under our proposal, executives would no longer significantly benefit from the timing games documented in our study.

A regulation along the lines of our proposal should go a long way toward eradicating this illicit, self-serving behavior, supporting the intent of federal securities laws and state fiduciary duty obligations.

Day 90 refers to 90 business days after the reported option grant date. [6] These returns are adjusted for the market movements. Burcu Avci, visiting scholar at the University of Michigan, Cindy A. Waterman Collegiate Professor of Business Administration and Professor of Business Law, and H.

As the graph shows, stock prices still do not appear to move randomly around option grants.

Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.

As shown above, the data provides evidence of manipulation by executives for surreptitious personal gain on a broad scale. The subsequent rise in stock price when the good news is announced immediately increases the value of the option.Bullet-dodging refers to the practice of accelerating the release of bad news so that stock price declines before the option grant date. .”[2] The fiduciary duty of loyalty in corporate law jurisprudence requires corporate officers and directors to act in the best interest of the corporation over their own self-interests.[3] Manipulation of the date of option grants and especially information flow to serve the self-interest of increasing executive compensation seems to run afoul of both areas of law.In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.

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