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Monday, July 17, 2006

New Study: Options Backdating is Much More Widespread Than Previously Thought

Eric Lie and Randall Heron just uploaded a new study on the backdating issue. They find that backdating is much more prevalent than previously thought. Here's the abstract:
We estimate that 18.9% of unscheduled, at-the-money option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction backdated remains as high as 19.9%. We further find a higher frequency of backdating among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.

You can read the whole thing here.

These numbers are pretty mind boggling, and should get a lot of press. If they're right, between a fifth and a quarter of all option grants were backdated in the period before the 2002 tighter reporting requirements came into play. I haven't fully digested their methodology yet, but it looks like the numbers in the abstract are (if anything) conservative.

Note: If you're new to this topic, I've written a short primer on backdating and springloading, here.

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