Stock Options Backdating and Its Effect on Firm Valuation PDF Download
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Author: Philip W. Yen
Publisher:
ISBN:
Category :
Languages : en
Pages : 140
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Book Description
Author: Philip W. Yen
Publisher:
ISBN:
Category :
Languages : en
Pages : 140
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Book Description
Author: David I. Walker
Publisher:
ISBN:
Category :
Languages : en
Pages : 64
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Book Description
The corporate stock option backdating scandal has dominated business page headlines since the summer of 2006. The SEC has launched investigations of more than one hundred companies with respect to the timing and pricing of stock options granted during the boom years of the late 1990s and early 2000s, and the number of firms caught up in the scandal continues to increase. This Article contributes to our understanding of the backdating phenomenon by analyzing the economics of backdating and the characteristics of the firms under investigation. Its main points are the following: First, given the high volatilities of the stocks of the technology companies that dominate the list of firms under investigation and the fact that options granted to executives and employees typically may not be exercised for several years, press reports that focus on the size of the strike price quot;discountsquot; achieved by backdating significantly overstate the impact on the value per share of backdated options. In some cases, reducing the strike price by a dollar per share by backdating increased the Black-Scholes value of the option by less than twenty cents per share. Second, backdating dramatically reduced the apparent value of options, which reduced the total level of executive compensation reported to shareholders. However, because the size of executive stock option grants often is determined by first establishing the value to be delivered and then quot;backing intoquot; the number of shares to be covered by the option, reducing the apparent value of option shares may have substantially increased the size and economic value of some backdated executive option grants. Third, comparison of semiconductor firms under investigation for backdating with peer companies that are not suggests an association between backdating and the use of options in compensating non-executive employees. This Article considers the effects of and several possible explanations for backdating non-executive options, including reducing apparent rank and file compensation. Finally, this Article argues that the backdating phenomenon is not an accounting scandal. Backdating has accounting consequences, but it is unlikely to have been accounting driven.
Author: Xiaoyan Cheng
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
We investigate the effect of stock option backdating on the information risk of accused companies. This research provides evidence concerning the consequences that a change in this risk may have on equity values after discovery that companies participated in this questionable behavior. We compare the earnings' response coefficients (ERC) for companies charged with backdating for periods before and after it was revealed that these companies allegedly engaged in these activities. Our results indicate a significantly negative change in ERCs. This finding is consistent with the conclusion that the credibility of backdating company's earnings is lower after discovery of their backdating behavior. We also estimate the amount of company valuation losses that are based on the changes in the ERC. We find, on average, that a firm suffered approximately $22.6 million in valuation losses for the three quarterly earnings announcements in our post announcement period or an additional $7.5 million in costs of information risk for each quarterly earnings announcement. Although our estimate of the valuation losses ($2,441 million) from declined ERCs is small when compared to the Bernile and Jarrell (2007)$100 billion estimate of the equity loss that all backdating companies suffered, the economic magnitude of valuation losses related to changes in information risk appears to be significant for each firm.
Author: Bernard T. Weinstein
Publisher:
ISBN: 9781607419846
Category : Securities fraud
Languages : en
Pages : 0
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Book Description
This book highlights the issue of backdating of stock options and its ramifications. Employee stock options are contracts giving employees the right to buy the company's common stock at a specified exercise price, at a specified time or during a specified period, and after a specified vesting period. The value of the option when granted lies in the prospect that the market price of the company's stock will increase by the time the option is exercised (used to purchase stock). At the grant date for the options, rather than selecting an exercise price based on the lower market price; that is, they backdated stock options to an earlier grant date. If this backdating occurred without public disclosure, the recipient of the stock options received increased compensation in violation of Securities and Exchange Commission (SEC) regulations, generally accepted accounting rules, and tax laws. Some backdating is said to involve "sloppiness", not fraud. The backdating of stock options has imposed costs on shareholders, employees, bondholders and taxpayers. This book consists of public documents which have been located, gathered, combined, reformatted, and enhanced with a subject index, selectively edited and bound to provide easy access.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 19
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Book Description
Since academic scholars and the Wall Street Journal reported widespread evidence indicating that option grants to executives were backdated, an avalanche of news stories followed documenting this ever-widening corporate scandal. In this study we ask: quot;How do disclosures of backdating affect shareholder value?quot; We closely examine 110 companies listed in the Wall Street Journal's Perfect Payday webpage, collecting all news stories related to options backdating. We find that shareholders of these 110 companies suffer on average significant stock-price declines, ranging between 20% and 50%. Moreover, these losses do not seem to be due to temporary overreactions (at least so far). The negative 20% abnormal return translates into total dollar losses of well over $100 billion. The negative 50% abnormal return translates to approximately one-quarter trillion dollars of lost shareholder value. There is no evidence that this decline is driven by temporary overreaction, judging by the average performance of these 110 companies over a nearly 2 year period. We are aware of no analysts, scholars or commentators predicting that such massive losses in shareholder value would result from options backdating problems.
Author: David I. Walker
Publisher:
ISBN:
Category :
Languages : en
Pages : 36
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Book Description
The corporate stock option backdating scandal has dominated business page headlines during the summer of 2006. The SEC is currently investigating more than seventy-five companies with respect to the timing and pricing of stock options granted during the boom years of the late 1990s and early 2000s, and the number of firms caught up in the scandal seems to increase every day. This essay contributes to our understanding of the backdating phenomenon by analyzing the economics of backdating and the characteristics of the firms under investigation. Its main points are the following: First, given the high volatilities of the stocks of the technology companies that dominate the list of firms under investigation and the fact that options granted to executives and employees typically may not be exercised for several years, press reports that focus on the size of the strike price quot;discountsquot; achieved by backdating significantly overstate the value of backdating. In some cases, reducing the strike price by a dollar per share by backdating increased the Black-Scholes value of the option by less than twenty cents per share. Second, completely unnoticed in the discussion so far is the fact that in many cases backdating dramatically reduced the apparent value of options. Because the size of executive stock option grants often is determined first by establishing the value to be delivered and then by calculating the number of shares to be covered by the option, reducing the apparent value of option shares may have substantially increased the size and true economic value of backdated executive option grants. Third, comparison of semiconductor firms under investigation for backdating with peer companies that are not suggests an association between backdating and the use of options in compensating non-executive employees. This essay considers several explanations for backdating non-executive options, including share limitations, minimizing apparent rank and file compensation, and cognitive biases. Finally, this essay argues that the backdating phenomenon is really not an accounting scandal. Backdating has accounting consequences, but it is unlikely to have been accounting driven.
Author: M. P. Narayanan
Publisher:
ISBN:
Category :
Languages : en
Pages : 63
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Book Description
The paper discusses the economic impact of legal, corporate governance, tax, disclosure, and incentive issues arising from revelation of dating games with regard to executive option grant dates. It provides an estimate of the value loss incurred by shareholders of firms implicated in backdating and compares it to the potential gain that executives might have obtained through backdating. Using a sample of firms that have already been implicated in backdating, we find that the revelation of backdating results in an average loss to shareholders of about 8%. This translates to about $500 million dollars per firm. By contrast, we estimate that the average potential gain from backdating to all executives in these firms is under $600,000 per firm annually. We suggest some remedies for not only backdating, but also for other dubious practices such as springloading.
Author: Jesse M. Fried
Publisher:
ISBN:
Category :
Languages : en
Pages : 1
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Book Description
Thousands of US companies appear to have secretly backdated stock options. This paper analyzes three forms of secret option backdating: (1) the backdating of executives' option grants; (2) the backdating of non-executive employees' option grants; and (3) the backdating of executives' option exercises. It shows that each type of backdating less likely reflects arm's-length contracting than a desire to inflate and camouflage executive pay. Secret backdating thus provides further evidence that pay arrangements have been shaped by executives' influence over their boards. The fact that so many firms continued to secretly backdate after the Sarbanes Oxley Act, in blatant violation of its reporting requirements, suggests recent reforms may have failed to adequately curb such managerial power.
Author: Stephen Becker
Publisher:
ISBN:
Category :
Languages : en
Pages : 17
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Book Description
Previous literature on the effects of disclosing options backdating problems focused mainly on estimating the cumulative and aggregate losses. This paper takes a different approach and investigates the effect of regulatory intervention on companies accused of backdating stock options. An event study approach is employed to analyze the announcements of backdating problems made by 83 companies. Our analysis shows that the companies under regulatory investigation suffered greater declines in value than companies who are not. However, the magnitude of the decline in value associated with outside investigation does not appear to be dependent on the timing of the regulatory intervention. In other words, no extra loss was incurred to those companies whose backdating problems were first exposed or triggered by regulatory action. Further analysis indicates that total loss in market value suffered by companies may reflect both the severity of the backdating problems and an extra cost imposed by regulatory investigations per se. Our preliminary estimate is that as much as one-third of the total loss may be attributable to regulatory involvement.
Author: Karen Brenner
Publisher:
ISBN:
Category :
Languages : en
Pages : 14
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Book Description
Companies grant compensatory option awards to provide retention and long term value creation incentives, aligning long term interests of shareholders and managers. The options issued by publicly traded companies in the US tend to be similar in design. Generally, the options are issued pursuant to a shareholder approved stock option plan, have an exercise price equal to the fair market value of the stock on the date of grant, become exercisable over a period of time, and expire at a fixed point in time after the date of grant. Academic work, bolstered by the financial press, has provided a body of evidence that suggests that many companies have issued options at prices below the market price at the date of grant. Such conduct, while not necessarily illegal, could give rise to a series of issues which have ranged from the grant of immediate compensation as opposed to retention and incentive compensation, to violating a corporation's stock option plan, to the improper corporate disclosure of compensation and therefore earnings, ultimately resulting in potential violations of tax and securities laws. These concerns have cast both ethical and legal clouds over many companies. This paper will review the recent academic literature on the topic of stock option backdating. It is clear that several academicians were instrumental in providing the early insight into this practice that has led to the public scandal. While the literature will show that the Sarbanes-Oxley Act of 2002 (SOX) has had a substantial effect in altering certain stock option practices it will also highlight that there are still a number of open issues needing the attention of corporate boards of directors.The academic work reviewed in this paper focuses on stock option grant manipulations of various types and their implications. Such manipulations include information timing, backdating of stock option grant dates and altering the exercise dates of stock options. The literature reviewed also discusses the economic impact of such events, including different means of calculating the manipulation of these grants, and the loss of overall market capitalization of the implicated firms. Other papers focus on director grants that are associated with opportunistic timing and the migration of backdating across firms due to board interlocks and weak corporate governance.
