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.
There is also some relatively early anecdotal evidence of backdating.
A particularly interesting example is that of Micrel Inc.
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, an artificially low exercise price might alter the tax payments for both the company and the option recipient.
Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.
Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
An example illustrates the potential benefit of backdating to the recipient.