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Securities and Finance

Options Backdating: A Primer

5 October 2006
By Dr. Patrick Conroy and Matthew Evans et al.

Executive compensation in the form of stock option grants has attracted more than its share of attention over the years: from the options profits of tech stock moguls before their stocks collapsed to the contentious issues over option valuation and expensing, employee stock options have been a lightning rod for securities litigation. Recently, a practice known as "options backdating" has come under scrutiny by federal investigators, auditors, investors, the media, and the plaintiffs' bar, among others.

To address these matters from an economic perspective, NERA's Securities and Finance Practice has created NERA Insights: Options Backdating Series, a series of papers dedicated to the analysis of options backdating. Part I of the series, "Options Backdating: A Primer," provides an introduction to the properties of options as a financial instrument and how these properties relate to the practice of backdating. This and other papers in the series will also include an updated, detailed table examining the companies that have been identified for potentially improper option-granting practices.

Part II of this series, Options Backdating: Accounting, Tax, and Economics, provides an overview of the potential accounting, tax, and economic consequences stemming from the practice of backdating. The next topic, "Options Backdating: The Statistics of Luck," will review the statistical practices used by academics and the popular press to identify timing. To learn more about NERA Insights: Options Backdating Series, please contact Dr. Conroy.