Awarding employees with stock options those are dated prior to the actual grant date.
The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.
(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.
However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.
This is important to note, because the grant date is what determines the exercise price on the options.
For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only per share.
The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.
grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.
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.The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.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.Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.