In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date.
This process makes the granted option in-the-money and of value to the holder.
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.
The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.
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.
the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.
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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.
The process of granting an option that is dated prior to the date that the company granted that option.
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Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.