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There is also some relatively early anecdotal evidence of backdating.A particularly interesting example is that of Micrel Inc.The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates.To the extent that companies comply with this new regulation, backdating should be greatly curbed.Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.An example illustrates the potential benefit of backdating to the recipient.

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After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.Instead, she decided to risk criminal prosecution by blowing the whistle.

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