News & Events

Lie Study Proves Stock Option Backdating

A columnist writing about the growing backdating scandal says that the problem, in brief, is that executives at some companies were backdating their stock options to dates when the stock was at its low for the year or the quarter, tilting the odds of profiting on those options heavily in their favor. Backdating isn't necessarily illegal, but following the complicated rules would largely eliminate the advantages of doing it. As actually practiced, it was stealing, pure and simple. We might never have heard about this slimy behavior if a researcher at the University of Iowa, ERIK LIE, hadn't decided to study the behavior of stock prices before and after option grants. He wasn't the first. Other academic researchers had studied the phenomenon and found suspicious results. But none of the researchers had suggested that executives might be doing anything illicit or illegal. Then Lie conducted the mother of all stock option studies, looking at 5,977 option grants between 1992 and 2002. In his paper, published a year ago, he found the same suspicious results as earlier researchers, only more pronounced. Further slicing and dicing the data, he discovered that unless executives possessed truly extraordinary abilities to forecast precise overall market movements, they had to be backdating the grants.


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