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.Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
21, 2014 /PRNewswire/ -- Shares in Ocwen Financial Corporation ("Ocwen" or the "Company") (NYSE: OCN) have plunged approximately 20%-its largest intraday drop since October 2008-after New York's Department of Financial Services accused the company of improperly option grants to periods of lower share prices (Yermack, 1997; Aboody and Kasznik, 2000; Chauvin and Shenoy, 2001; Lie, 2005; Heron and Lie, 2007; and Narayanan and Seyhun, 2006), or decreasing earnings to suppress share price when options are granted (Baker, Collins, and Reitenga, 2003; Cheng and Warfield, 2005; Bergstresser and Philippon, 2006; Cornett, Marcus, and Tehranian, 2008; Mc Anally, Srivastava, and Weaver, 2008).By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase.This made me think about the possibility that some of the grants had been backdated.(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.In particular, he found that stock prices tend to increase shortly after the grants.
In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.