One study, by Erik Lie, a finance professor at the University of Iowa's business school, looked at thousands of option grants. On average, he found a pattern of stocks dipping sharply just before the date of option grants, then rising immediately afterward -- even after adjusting for overall market returns. Equally striking, he found market prices as a whole tended to rise after grants -- which he suggested shows that executives may have backdated options, already knowing how the market moved.
A second study, by Prof. Lie and Randall Heron of Indiana University's business school, showed the patterns all but ceased after August 2002, when rules put in place by the Sarbanes-Oxley corporate-reform law began requiring executives to report option grants to regulators within two days, instead of the weeks or months previously allowed. With less leeway to choose a favorable grant date, "most of the effect disappeared," said Prof. Lie.
He said any backdating likely occurred at only a small fraction of companies. But given the widespread use of options for compensation, he said, the practice could have resulted in a total of "billions of dollars" in extra pay going to insiders at those companies.
SEC investigators previously had posited that companies were timing grants to benefit from positive corporate news that would drive up stock prices, such as strong earnings. But increasingly they are focusing on backdating.
