Of backdating of
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Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.
A particularly interesting example is that of Micrel Inc.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.
Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.
In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.
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.
Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient.In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.Backdating does not violate shareholder-approved option plans.For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.In particular, he found that stock prices tend to increase shortly after the grants.