This made me think about the possibility that some of the grants had been backdated.
I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.In a study that I started in 2003 and disseminated in the first half of 2004 and that was published in Management Science in May 2005 (available at I found that stock prices also tend to decrease before the grants.Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.
In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.
Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.
Instead, she decided to risk criminal prosecution by blowing the whistle.
Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date (when backdating still might work), and for longer periods for the minority of grants that violate the two-day reporting requirements.
We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants.
Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.