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Taxes and the backdating of stock option exercise dates

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Author Info

  • Dhaliwal, Dan
  • Erickson, Merle
  • Heitzman, Shane

Abstract

We investigate the backdating of stock option exercises. Before SOX, we find evidence that some exercises were backdated to days with low stock prices. Consistent with a tax-based incentive, these suspect exercises are more likely when the personal tax savings from backdating are higher. However, suspect CEO exercises generate average (median) estimated tax savings of $96,000 ($7,000). These savings appear modest relative to the costs insiders and firms face. We find that the likelihood of a suspect exercise increases in the likelihood of option grant backdating. This suggests that agency problems associated with backdating permeate option compensation in some firms.

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File URL: http://www.sciencedirect.com/science/article/B6V87-4TN82D5-1/2/32af2a6753c2ecc3fdfeceeed16551c7
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 47 (2009)
Issue (Month): 1-2 (March)
Pages: 27-49

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Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:27-49

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Web page: http://www.elsevier.com/locate/jae

Related research

Keywords: Stock option compensation Backdating Taxes Insider trading Regulation;

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Cited by:
  1. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
  2. Chyz, James A., 2013. "Personally tax aggressive executives and corporate tax sheltering," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 311-328.
  3. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
  4. Carola Frydman & Raven S. Molloy, 2011. "Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms," NBER Working Papers 16812, National Bureau of Economic Research, Inc.
  5. Brockman, Paul & Martin, Xiumin & Puckett, Andy, 2010. "Voluntary disclosures and the exercise of CEO stock options," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 120-136, February.

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