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Taxes and the backdating of stock option exercise dates

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  • 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.

Suggested Citation

  • Dhaliwal, Dan & Erickson, Merle & Heitzman, Shane, 2009. "Taxes and the backdating of stock option exercise dates," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 27-49, March.
  • Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:27-49
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
    2. Lee Biggerstaff & David C. Cicero & Andy Puckett, 2013. "Unethical Culture, Suspect CEOs and Corporate Misbehavior," NBER Working Papers 19261, National Bureau of Economic Research, Inc.
    3. Chris Veld & Betty H.T. Wu, 2014. "What Drives Executive Stock Option Backdating?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1042-1070, September.
    4. Frydman, Carola & Molloy, Raven S., 2011. "Does tax policy affect executive compensation? Evidence from postwar tax reforms," Journal of Public Economics, Elsevier, vol. 95(11), pages 1425-1437.
    5. Blacconiere, Walter G. & Frederickson, James R. & Johnson, Marilyn F. & Lewis, Melissa F., 2011. "Are voluntary disclosures that disavow the reliability of mandated fair value information informative or opportunistic?," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 235-251.
    6. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    7. Chyz, James A., 2013. "Personally tax aggressive executives and corporate tax sheltering," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 311-328.
    8. Alexander Ljungqvist & Liandong Zhang & Luo Zuo, 2017. "Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking," Journal of Accounting Research, Wiley Blackwell, vol. 55(3), pages 669-707, June.
    9. 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.
    10. Devos, Erik & Elliott, William B. & Warr, Richard S., 2015. "CEO opportunism?: Option grants and stock trades around stock splits," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 18-35.
    11. Biggerstaff, Lee & Cicero, David C. & Puckett, Andy, 2015. "Suspect CEOs, unethical culture, and corporate misbehavior," Journal of Financial Economics, Elsevier, vol. 117(1), pages 98-121.
    12. repec:eee:jaecon:v:64:y:2017:i:1:p:123-149 is not listed on IDEAS

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