Backdating on updating credit card information in itunes
Cohen holds a Bachelor of Science in journalism from the University of Illinois at Urbana-Champaign.
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.
In a study that I started in 2003 and disseminated in the first half of 2004 and that was published in Management Science in May 2005 (available at I found that stock prices also tend to decrease before the grants.
Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).
The dates of metered postage are encased in tamper-proof sections.
While they can be removed, they cannot be replaced, and such tampering is clear to postal authorities when meters are examined, as they sometimes are recalled for service or for examinations to prevent illegal use.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,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.
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.
This made me think about the possibility that some of the grants had been backdated.
(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.