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.
However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.
Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.
He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.
This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.
Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.An example illustrates the potential benefit of backdating to the recipient.The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.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.The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.