More than 2,000 companies appear to have used backdated stock
options to sweeten their top executives' pay packages, according to a
new study that suggests the practice is far more widespread than
The new statistical analysis,
which comes amid a broadening federal inquiry of the practice of timing
options to the stock market, estimates that 29.2 percent of companies
have used backdated options and 13.6 percent of options granted to top
executives from 1996 to 2005 were backdated or otherwise manipulated.
far, more than 60 companies have disclosed that they are the targets of
government investigations, are the subject of investor lawsuits or have
conducted internal audits involving the practice, in which options are
backdated to days when the company's shares trade at low prices. They
include Apple Computer, CNet and Juniper Networks.
week, the United States attorney in San Francisco announced a task
force to investigate the backdating of options, which appears to have
been particularly popular in Silicon Valley during the 1990's dot-com
boom. The study found that the abuse was more prevalent in
high-technology firms, where an estimated 32 percent of unscheduled
grants were backdated; at other firms, an estimated 20 percent were
An author of the study said the analysis suggested
that the disclosures so far about backdated stock options may be just
the tip of the iceberg.
"It is pretty scary, and it's quite
surprising to see," said Erik Lie, an associate professor of finance at
the Tippie College of Business at the University of Iowa.
Lie said the findings were so surprising that he asked several
colleagues to check his numbers. Together, they concluded that the
numbers probably erred on the low side.
The study by Professor Lie and Randall A. Heron, of the Kelley School of Business at Indiana University,
was posted Saturday to a University of Iowa Web site. Using information
from the Thomson Financial Insider Filing database of insider
transactions reported to the Securities and Exchange Commission, the
two men examined 39,888 stock option grants to top executives at 7,774
companies dated from Jan. 1, 1996 to Dec. 1, 2005.
were based on an analysis of whether share values increased or declined
after option grant dates. "Half should be negative and half should be
positive," said Professor Lie. "That's the underlying logic."
But the analysis revealed that the distribution was shifted upward.
"This is not random chance. It's something that's manipulated, clearly," said Professor Lie.
the companies examined, 29.2 percent, or 2,270, had at some point
during the period manipulated stock option grants, the study estimated.
"Over all, our results suggest that backdated or otherwise
manipulated grants are spread across a remarkable number of firms,
although these firms did not manipulate all their grants," the authors
The study concluded that before Aug. 29, 2002, 23 percent
of unscheduled grants - as distinguished from grants that companies
routinely schedule annually - were backdated. Unscheduled grants are
easier to backdate.
On that day, the S.E.C. tightened reporting
requirements to require that executives report stock option grants they
receive within two business days. After that, the backdating figure
declined to 10 percent of unscheduled grants, the paper said.
Lie said that a number of companies simply ignored the new reporting
rule. "You still see problems. The rule is not enforced," he said.
Lie, who first alerted S.E.C. investigators to problems with backdating
after an analysis that he conducted in 2004, said there was some
positive news in his new research.
"It has been suggested that
some accounting firms have been pushing this practice more than
others," he said. "There's actually very little evidence of that, which
to me is very comforting."
The study found that smaller
auditors rather than larger ones were associated with a larger
proportion of late filings and unscheduled grants, which most likely
lead to more backdating and manipulative practices.
It also singled out two firms - PricewaterhouseCoopers and KPMG - as being associated with a lower percentage of manipulation.
- 185 Corruption