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Is backdating executive stock options always costly to shareholders?
Author(s) -
Grégoire Philippe,
Glenn Hubbard Robert,
Koehn Michael F.,
Audenrode Marc Van,
Royer Jimmy
Publication year - 2013
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2012.00487.x
Subject(s) - shareholder , stock options , business , non qualified stock option , stock (firearms) , executive compensation , welfare , actuarial science , finance , economics , restricted stock , stock market , corporate governance , mechanical engineering , paleontology , horse , engineering , biology , market economy
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.