The U.S. Securities and Exchange Commission has recently increased its scrutiny of the timing of option grants by publicly traded companies. Motivating the SEC’s interest is longstanding academic research showing an overall pattern of stock prices dropping just before the reported dates of option grants and rising immediately thereafter. See, e.g., Donal Byard & Ying Li, “Guest Column, What Influences the Timing of Option Grants,” The Friday Report, Dec. 17, 2004. The SEC appears to have initially focused on whether companies were timing grants in order to benefit from positive corporate news. Recently, however, the agency appears to have shifted its focus to corporate backdating of options.

Five of the reportedly dozen companies whose practices are under review have publicly disclosed the existence of the SEC inquiries. This article summarizes one of the SEC’s investigations and provides recommendations designed to help a public company prevent the manipulation of option-grant dates.

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