READ MORE David Hirshleifer is Professor of Finance at the University of California, Irvine.This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital.Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period.The company would then grant the option but date it at or near its lowest point.Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.
ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.
This adjustment to the filing window came in with the Sarbanes-Oxley legislation.
Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.
This process makes the granted option in-the-money and of value to the holder.
This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date.