Taxes and the Backdating of Stock Option Exercise Dates
Dan S. Dhaliwal
University of Arizona - Department of Accounting
University of Chicago - Booth School of Business
Simon School of Business, University of Rochester
September 26, 2008
Journal of Accounting & Economics (JAE), Forthcoming
We investigate the backdating of stock option exercises. Before SOX, we find evidence that some exercises were backdated to days with low stock prices. Consistent with a tax-based incentive, these suspect exercises are more likely when the personal tax savings from backdating are higher. However, suspect CEO exercises generate average (median) estimated tax savings of $96,000 ($7,000). These savings appear modest relative to the costs insiders and firms face. We find that the likelihood of a suspect exercise increases in the likelihood of option grant backdating. This suggests that agency problems associated with backdating permeate option compensation in some firms.
Keywords: Stock option compensation, Backdating, Taxes, Insider trading, Regulation
JEL Classification: D82, G34, G38, H24, J33, K22Accepted Paper Series
Date posted: September 29, 2008
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