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The study also found that the prevalence of backdating was greater among technology companies, small companies and companies with high stock-price volatility.
Finally, the study estimates that almost 30% of companies that granted options to top executives between 19 engaged in some form of option price manipulation.
This fraction was roughly cut in half once the new Form 4 requirement took effect.
Furthermore, where grants were reported within one day of the grant date, the study found no discernible abnormal stock return pattern.
" In the study, Lie and another professor examined the stock price pattern surrounding option grants (i.e., the pattern that companies' stock returns were abnormally high immediately after executive stock option grants and abnormally low in the period leading up to the grants) made before and after August 29, 2002, the effective date of the SEC requirement that Forms 4 report option grants within two business days.
His hypothesis was that, if the stock price pattern were attributable to backdating, the price pattern should diminish following implementation of the new regulation.The SEC is investigating many companies, ranging from small to Fortune 500 companies, for options irregularities.Similarly, the FBI has reported that it has 52 companies under criminal investigation. Department of Justice has said it will bring criminal charges where defendants falsify corporate books and records; issue false financial statements; lie to boards of directors, auditors or the SEC; or file false reports.The new analysis looked at unscheduled grants (defined as those that did not occur within one day of the one-year anniversary of the prior year’s grant date) to CEOs at almost 8,000 companies.The new analysis estimated that 23% of unscheduled, at-the-money grants to top executives dated between 1996 and August 2002 were backdated or otherwise manipulated.His study did indeed support his hypothesis, finding that the stock price pattern became much less evident once the new regulation became effective.Specifically, the study found that the magnitude of the average abnormal return during the week before the grants is roughly six times larger, and during the period after the grants is roughly five times larger, for the period between 1/1/2000 and 8/28/2002 than for the period between 8/29/2002 and 11/30/2004.The backdating problem was first highlighted by Professor Erik Lie of the University of Iowa, who published his initial study in 2004.Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.But while options backdating may have a truncated life expectancy, its current impact is robust.