Is Backdating Executive Stock Options Always Costly to Shareholders?

23 Pages Posted: 29 Aug 2013

See all articles by Philippe Gregoire

Philippe Gregoire

Lakehead University - Faculty of Business Administration

R. Glenn Hubbard

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Michael F. Koehn

Analysis Group, Inc.

Marc Van Audenrode

Université Laval - Département d'Économique; Analysis Group, Inc.

Jimmy Royer

Analysis Group, Inc.; Université de Sherbrooke - Department of Economics

Date Written: September 2013

Abstract

We use a binomial model to investigate the cost to shareholders of backdating employee stock option (ESO) grants to award in‐the‐money rather than at‐the‐money options to a manager. When the expected return of the stock underlying an ESO is sufficiently close to the risk‐free rate, a backdating arrangement can always be structured to simultaneously improve shareholders’ wealth and the manager's utility. The smaller the manager's non‐option wealth, personal income tax rate or risk tolerance, the more likely a backdating arrangement can be welfare improving.

Keywords: Employee stock options, Backdating, Risk aversion, Contingent pricing, 150, 410

JEL Classification: G13, G34

Suggested Citation

Grégoire, Philippe and Hubbard, Robert Glenn and Koehn, Michael F. and Van Audenrode, Marc and Royer, Jimmy, Is Backdating Executive Stock Options Always Costly to Shareholders? (September 2013). Accounting & Finance, Vol. 53, Issue 3, pp. 667-689, 2013, Available at SSRN: https://ssrn.com/abstract=2317659 or http://dx.doi.org/10.1111/j.1467-629X.2012.00487.x

Philippe Grégoire (Contact Author)

Lakehead University - Faculty of Business Administration ( email )

955 Oliver Road
955 Oliver Road
Thunder Bay, Ontario P7B 5E1
Canada

Robert Glenn Hubbard

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael F. Koehn

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Marc Van Audenrode

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada
418-656-3125 (Phone)

Analysis Group, Inc. ( email )

1080 Beaver Hall Hill
Suite 1810
Montreal, Quebec H2Z 1S8
Canada

Jimmy Royer

Analysis Group, Inc. ( email )

1000 De La Gauchetiere
Suite 1200
Montreal, Quebec H3B4W5
Canada

Université de Sherbrooke - Department of Economics

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
1,159
PlumX Metrics