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.
A 2004 NY Times article describes this case in greater detail (the article is available here), and so does a 2006 article in Tax Notes Magazine (available here).
In a 2004 CNBC interview, Remy Welling said that "this particular -- well, it's called a 30-day look-back plan, is even widespread in Silicon Valley and maybe throughout the country."The terms "spring loading" and "bullet dodging" refer to the practices of timing option grants to take place before expected good news or after expected bad news, respectively. This is what Professor Yermack hypothesized in his article discussed above, though he never used these terms.
This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.
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.
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.
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.
Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.
(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.