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.Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.
Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.This made me think about the possibility that some of the grants had been backdated.I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants.In particular, he found that stock prices tend to increase shortly after the grants.He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.
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However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.