Stock Option Backdating: Implications for Private Companies

Journal of Accounting, Ethics & Public Policy, Volume 8, No. 3 (2007)

20 Pages Posted: 2 Jan 2013

See all articles by Leigh Johnson

Leigh Johnson

Murray State University - Accounting Department

Holly R. Rudolph

Murray State University - Accounting Department

Date Written: 2007

Abstract

The stock option backdating scandal has been widely covered for public companies in the last few years. However, there is little to no literature available on its impact on private companies. This paper discusses the accounting, tax, securities and corporate governance issues that may influence a private company to backdate options. The paper posits that private companies may be motivated to backdate the grant date of stock options due to financial accounting rules, restrictions in Rule 701 promulgated under the Securities Act of 1933, and/or governance oversights. Further, it poses that employees of private companies may be motivated to manipulate the exercise date of stock options in an attempt to dodge tax payments. It also summarizes certain accounting, tax, securities and governance implications of illegal backdating practices for private companies and concludes with some recommendations for eliminating backdating problems for such companies.

Keywords: stock option, backdating, Rule 701

JEL Classification: M4

Suggested Citation

Johnson, Leigh and Rudolph, Holly R., Stock Option Backdating: Implications for Private Companies (2007). Journal of Accounting, Ethics & Public Policy, Volume 8, No. 3 (2007), Available at SSRN: https://ssrn.com/abstract=1915763

Leigh Johnson (Contact Author)

Murray State University - Accounting Department

Murray, KY 42071-3314
United States

Holly R. Rudolph

Murray State University - Accounting Department ( email )

Murray, KY 42071-3314
United States

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