Taxes and the Backdating of Stock Option Exercise Dates
50 Pages Posted: 5 Jan 2007 Last revised: 28 Sep 2008
Date Written: September 23, 2008
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: Suggested Citation