Is it timing or backdating of option grants?

Abstract

Using a unique dataset from the Netherlands, we investigate three questions of interest. First, we explore the effects of a rule change in September 2002 on option grant dates. Second, we examine the retroactive backdating of option grant dates. Finally, we look at the timing of option grant dates along with news releases around those dates. The outcome of the analyses shows that there are no significant abnormal cumulative returns in the period before the option grant date. However, we find significant abnormal cumulative returns during a period of 30 trading days thereafter, even for scheduled options granted before September 2002. Furthermore, it appears that earnings news releases around option grant dates are managed. The empirical results provide evidence that the timing of news can be seen as a substitute for both backdating option grants and the timing of the option grant date after September 2002. The paper presents novel findings that option grants are retroactively backdated. The latter outcome is based not only on the effects of the change in legislation, but also on an analysis of the relation between the number of options granted and the difference between the highest annual stock price and the exercise price of the option grants. These findings are robust under different model specifications.