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Lie Study Fueled Stock Option Probes

This week, the chairman of the U.S. Securities and Exchange Commission (SEC) said the agency is poised to bring its first lawsuit "very soon" regarding the practice of so-called backdated options. ERIK LIE and Randall Heron, finance experts at the University of Iowa and Indiana University, crunched numbers that are fueling the current probes. Often, the option to buy shares will be granted to executives "at the money," at the current share price. If the stock rises, they can make a profit by exercising that option. The new study by Lie and Heron compares the timing of options with the behavior of stock prices, and concludes that the number of bargain options given to executives could not be mere coincidence. Instead, they argue that backdating has occurred, with boards dating the grants (after the fact) for optimal prices. "We estimate that 18.9 percent of unscheduled, at-the-money option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated," the authors wrote in the study.

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