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Is backdating executive stock options always costly to shareholders? |
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| Authors: | Philippe Grégoire Robert Glenn Hubbard Michael F Koehn Marc Van Audenrode Jimmy Royer |
| Institution: | 1. Faculty of Business Administration, Université Laval, Québec, QC, Canada;2. Graduate School of Business, Columbia University, New York, NY, USA;3. Analysis Group, Montréal, QC, Canada;4. Analysis Group, Menlo Park, CA, USA;5. Department of Economics, Université de Sherbrooke, Sherbrooke, QC, Canada |
| 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 G13 G34 |