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Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.

(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.There is also some relatively early anecdotal evidence of backdating.A particularly interesting example is that of Micrel Inc.Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.

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