Does Backdating Explain the Stock Price Pattern Around Executive Stock Option Grants?

46 Pages Posted: 26 Jan 2006

See all articles by Randall A. Heron

Randall A. Heron

Indiana University - Kelley School of Business

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Abstract

Extant studies document that stock returns are abnormally negative before executive option grants and abnormally positive afterward. We find that this return pattern is much weaker since August 29, 2002, when the SEC requirement that option grants must be reported within two business days took effect. Furthermore, in those cases in which grants are reported within one day of the grant date, the pattern has completely vanished, but it continues to exist for grants reported with longer lags, and its magnitude tends to increase with the reporting delay. We interpret these findings as evidence that most of the abnormal return pattern around option grants is attributable to backdating of option grant dates.

Keywords: Executive stock option grants, backdating

JEL Classification: J33, M52

Suggested Citation

Heron, Randall A. and Lie, Erik, Does Backdating Explain the Stock Price Pattern Around Executive Stock Option Grants?. Journal of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=877889

Randall A. Heron

Indiana University - Kelley School of Business ( email )

Kelley School of Business
801 W. Michigan Street
Indianapolis, IN 46202
United States
317-274-4984 (Phone)

Erik Lie (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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5020 Main Library
Iowa City, IA 52242-1000
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