Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.
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.There is also some relatively early anecdotal evidence of backdating.A particularly interesting example is that of Micrel Inc.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.
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.
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.