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Because of these complexities, many companies are unable to keep all paperwork in line.

As we will explore in the coming pages, stock option backdating is anything but a straightforward issue.

In the coming pages, the history, legal issues, and effects on shareholder value will be explored.

Introduction Stock option backdating is a popular issue in today’s business environment.

While there are legal ways to backdate stock options, as we found, few companies can properly account for backdated options.

As a result, we found that many companies lose top talent, are scrutinized by regulatory bodies, and are subject to fines and penalties.

Financial economists held that agents or managers are effort-adverse (Jensen and Meckling 1976; Jensen and Murphy 1990), and rewards, such as stock options tied to performance, are required to provide executives the incentive to supply effort, but more specifically, to supply effort which is consistent with the interest of stockholders.

Executive Summary Stock option backdating is a complex issue.An executive stock option (ESO) is an option to buy common stock of a company, generally issued as a form of non-cash compensation.In the 1980s, the main purpose for corporations to issue stock options to its executives was to align executives’ interests with those of the company’s shareholders.Logically, we began to wonder why so many companies were illegally backdating options when the risk is so high.Further investigation has revealed the complexities involved with a legal backdating program.With recent changes made to the accounting and reporting rules for stock options, a storied array of companies have announced illegal practices, investigations, executive resignations, and much more.

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