Study Finds Options Backdating a Common Practice

July 17, 2006 ( - A new analysis released by the University of Iowa estimates that 29.2% of companies have backdated options and also tabulated that 13.6% of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated.

The New York Times reports that the study by Erik Lie, an associate professor of finance at the Tippie College of Business at the University of Iowa, and Randall Heron, of the Kelley School of Business at Indiana University, used information from the Thomson Financial Insider Filing database of insider transactions reported to the Securities and Exchange Commission (SEC). Lie and Heron examined 39,888 stock option grants to top executives at 7,774 companies dating from January 1, 1996, to December 1, 2005.

The results revealed that 2,270 companies appear to have backdated stock option grants to executives. Lie said the findings were so surprising that he asked several colleagues to check his numbers, according to the Times. He and his colleagues concluded that the numbers probably erred on the low side.

The study also showed, before the SEC’s Sarbanes-Oxley Act went into effect on August 29, 2003, 23% of unscheduled grants were backdated. The act required executives to report stock option grants they received within two business days. After the effective date of the act, the study said only 10% of unscheduled grants appear to have been backdated.

The study pointed out two firms associated with a lower percentage of grant date manipulation – PricewaterhouseCoopers and KPMG.

Lie alerted the SEC of the practice after a 2004 study he conducted.

More than 60 companies have announced government investigations into their stock options practices, shareholder lawsuits or internal investigations (See Broadcom Internal Probe Finds Backdated Options ). A Wall Street Journal site has an updated list of companies suspected of backdating options .