Application of Current Stock Option Backdating Methodologies Can Be Misleading, According to New NERA Economic Consulting Paper
8 March 2007
New York (March 8, 2007) -- Using currently available academic studies on options timing to draw conclusions about specific companies can be misleading, according to the NERA Economic Consulting white paper released today, "Options Backdating: The Statistics of Luck."
According to co-authors NERA consultants, Dr. Renzo Comolli, Dr. Branko Jovanovic, and Dr. Patrick Conroy, current academic studies on backdating use methodologies designed to detect aggregate patterns, rather than analyze specific companies. No published study to date has addressed the likelihood of option grants of specific companies. Because of this, the studies do not disentangle legal from illegal practices, according to the authors.
The NERA paper also examines many misconceptions currently circulating about the statistical calculations that have been used in connection with backdating -- including some used in the March 18, 2006 Wall Street Journal article, "The Perfect Payday."
Among other findings, the authors show that:
- Some grant patterns that may at first appear extremely unlikely are actually likely
- The Wall Street Journal article did not account for the vast number of directors and officers (D&O) in the US who receive options grants. With such a large number of D&O, it is a near certainty that some of them would receive most of their grants on days when the stock price was particularly low, even in absence of any illegal practices
- Factors that were disregarded in published probability calculations may be especially important when estimating the likelihood of option grants for specific companies
About NERA
NERA Economic Consulting is an international firm of economists who understand how markets work. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Our global team of more than 600 professionals operates in over 20 offices across North and South America, Europe, Asia, and Australia.
NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of Mercer Specialty Consulting, an MMC company.
