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A particularly interesting example is that of Micrel Inc.
For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.
This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.
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.
Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.
(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.
However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.