Consistent with a tax-based incentive, these suspect exercises are more likely when the personal tax savings from backdating are higher.
However, suspect CEO exercises generate average (median) estimated tax savings of ,000 (,000).
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In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
Erickson appreciates financial support from the Graduate School of Business at the University of Chicago.
Heitzman appreciates financial support from the Simon Graduate School of Business at the University of Rochester.
According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.
The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.