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What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated?

Kelley School of Business, Indiana University, Indianapolis, Indiana 46202
Tippie College of Business, University of Iowa, Iowa City, Iowa 52242
rheron{at}iupui.edu
erik-lie{at}uiowa.edu

We estimate that 13.6% of all option grants to top executives during the period 1996–2005 were backdated or otherwise manipulated. Our study primarily focuses on grants that were unscheduled and at-the-money, of which we estimate that 18.9% were manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction of manipulated grants remains as high as 19.9%. We further find a higher frequency of manipulation among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.

Key Words: executive compensation; stock option grants; backdating
History: Received: August 7, 2007; accepted: October 19, 2008.