Option backdating board interlocks

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Because of the features of these instruments legislators, regulators and shareholders have raised concerns about them.Understanding these strategies and how they are used by insiders has important implications for both incentive contracting and insider trading.We examine the use of four different types of hedging instruments that insiders can use to hedge their ownership in the firm.These instruments include zero cost collars, pre paid variable forwards, exchange funds, and equity swaps.This conclusion would clearly make the practice much more wide-spread than anyone had initially thought.The study also suggests that the practice may have proliferated as a result of directors who held positions on more than one board.

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If correct, it means the watchdog is the source of what may –backdating is not illegal in and of itself – be an improper practice.Access to society journal content varies across our titles.If you have access to a journal via a society or association membership, please browse to your society journal, select an article to view, and follow the instructions in this box.Later, many thought that the practice occurred predominately during the period before the passage of the Sarbanes-Oxley Act in 2001.Now, however, a new study by Professor John Bizjak of Portland State University and Michael Lemmon and Ryan Whitby of the University of Utah entitled “Option Backdating and Board Interlocks” suggests that as many as fifty percent of the companies that issued options during the 1990’s engaged in backdating.

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