02_optionbackdating - Given a year-end price of $85, the...

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ACCY 302 (Shin) Class 02 Fall 2009 Backdating of Executive Stock Option (ESO) Grants What is backdating? Backdating is the practice of marking a document with a date that precedes the actual date. What is the benefit of backdating ESO grants? ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options. An example illustrates the potential benefit of backdating to the recipient. The Wall Street Journal pointed out a CEO option grant dated October 1998. The number of shares subject to option was 250,000 and the exercise price was $30 (the trough in the stock price graph below.)
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Unformatted text preview: Given a year-end price of $85, the intrinsic value of the options at the end of the year was ($85-$30) x 250,000 = $13,750,000. 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. ACCY 302 (Shin) Class 02 Fall 2009 So far, eighteen CEOs swept out. More than a hundred public companies under federal investigation and over $5 billion in profits erased by restatements. Indictments so far: five former top executives at two companies, Brocade Communications Systems Inc. and Comverse Technology Inc. The toll of the stock options timing affair -- corporate America's scandal of the year -- has been heavy. Federal officials say more prosecutions will be brought in 2007 over manipulation of the timing of stock option grants to enrich top company executives....
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This note was uploaded on 08/30/2009 for the course ACCY 301 taught by Professor Keller during the Spring '08 term at University of Illinois at Urbana–Champaign.

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02_optionbackdating - Given a year-end price of $85, the...

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