Stock option backdating cases
At those companies, the shares had on average abnormal low returns of minus 3.5% before the options were granted and abnormal high returns of 3.4% in the months right after.That’s a huge and timely swing for seemingly random fluctuations.So how did CEOs manage to manipulate stock prices so adroitly?Daines and his colleagues find evidence of several techniques, many of them tied to when companies decide to disclose important new information.It was especially deep, however, at companies that were also hard to value and where company announcements and “guidance” could have a big impact on investor expectations.Think here of a fast-growing technology company, where it’s difficult to predict the exact pace of future growth and where the statements of top management can significantly influence investor expectations.One key reform: Companies began scheduling their upcoming option grants well in advance and on immovable dates.
Instead of manipulating the dates of option grants to match a dip in the stock price, companies appear to be manipulating the stock price itself so that it’s low on the predetermined option date and higher right afterward. “But we tested for all kinds of benign explanations and none of them fit the data.
It’s been a decade since scores of corporations became embroiled in the “dating game” scandals over backdated CEO stock options, and most people thought that reforms in the aftermath ended the problem years ago. Daines of Stanford University, has unearthed a new and potentially more sinister version of the scheme — call it Dating Game 2.0 — that replaced the original.
Daines is the Pritzker Professor of Law and Business at Stanford Law School and a senior faculty member at the Arthur and Toni Rembe Rock Center on Corporate Governance, which is a joint initiative of the law school and Stanford Graduate School of Business.
That’s above and beyond their salaries and the official value of their options.
In the 90 days before the option grant, the average stock generated what analysts call an “abnormal negative return” of 1.9% — that’s a return 1.9% below those on shares of comparable companies during that same period.