Capital backdating

Given the recent resurgence of news relating to options backdating, I thought I’d reprint the paper for those who might be interested.

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In early research, we found an excellent resource created by a business professor in the Midwest.

His discussion included, among other items, legal ways to backdate stock options.

Firms predicted to have backdating problems, but not the subject of publicly revealed investigations, experienced stock price performance during the same period that was remarkably similar to that of firms with publicly revealed investigations.

In contrast, firms not predicted to have backdating problems experienced normal stock price performance.

With recent changes made to the accounting and reporting rules for stock options, a storied array of companies have announced illegal practices, investigations, executive resignations, and much more.

Some of the companies involved come as a surprise to many: Apollo Group, Apple Computer, Home Depot, Corinthian Colleges, Electronic Arts, Gap, and more than 120 others.

Stock options may be offered on a regular schedule, as part of a normal executive compensation package, or unscheduled, as a performance- or inventive-based reward.

It is with the later of these two forms that the majority of options backdating fraud occurs.

When illegal backdating practices lead to negative actions, the shareholders suffer in many ways.

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