Taxes and the Backdating of Stock Option Exercise Dates

50 Pages Posted: 5 Jan 2007 Last revised: 28 Sep 2008

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson

University of Chicago - Booth School of Business

Shane Heitzman

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2008

Abstract

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, G38, H24, J33, K22

Suggested Citation

Dhaliwal, Dan S. and Erickson, Merle and Heitzman, Shane, Taxes and the Backdating of Stock Option Exercise Dates (September 23, 2008). Available at SSRN: https://ssrn.com/abstract=954974 or http://dx.doi.org/10.2139/ssrn.954974

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Merle Erickson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0716 (Phone)
773-702-0458 (Fax)

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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