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Backdating Options Widespread

Posted By Barry Ritholtz On July 17, 2006 @ 10:15 am In Corporate Management,Investing | Comments Disabled

The NYT has joined the chorus of option critics, jumping intp the fray with this story today: Study Finds Backdating of Options Widespread [1].

Here’s a quick excerpt:

"More than 2,000 companies appear to have used backdated stock options to sweeten their top executives’ pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed.

The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated…

Last week, the United States attorney in San Francisco announced a task force to investigate the backdating of options, which appears to have been particularly popular in Silicon Valley during the 1990’s dot-com boom. The study found that the abuse was more prevalent in high-technology firms, where an estimated 32 percent of unscheduled grants were backdated; at other firms, an estimated 20 percent were backdated."

What makes this so significant is that the underlying study underestimated the number of firmns engaging in backdating:

"Professor Lie said the findings were so surprising that he asked several colleagues to check his numbers. Together, they concluded that the numbers probably erred on the low side."

Of the companies examined, 29.2 percent, or 2,270, had at some point during the period manipulated stock option grants, the study estimated.

“Over all, our results suggest that backdated or otherwise manipulated grants are spread across a remarkable number of firms, although these firms did not manipulate all their grants,” the authors said.

The study concluded that before Aug. 29, 2002, 23 percent of unscheduled grants — as distinguished from grants that companies routinely schedule annually — were backdated. Unscheduled grants are easier to backdate.

That date is significant: Its when the S.E.C. tightened reporting requirements — execs must now report stock option grants they receive within two business days.

Not surprisingly, since that time, backdating has declined to 10 percent of unscheduled grants.


Study Finds Backdating of Options Widespread [1]
NYTimes, July 17, 2006

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[1] Study Finds Backdating of Options Widespread: http://www.nytimes.com/2006/07/17/business/17options.html?ex=1310788800&en=e759d2f20a6d4415&ei=5090&partner=rssuserland&emc=rss

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