Taxes and the backdating of stock option exercise dates

Dhaliwal, Dan S.; Erickson, Merle; Heitzman, Shane

doi:10.1016/j.jacceco.2008.09.004

Cited by 50 publications

(27 citation statements)

References 28 publications

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“…131 These tax incentives appeared strong enough to lead some executives to backdate the exercise date. Before the enactment of SOX, Dhaliwal et al (2009) Taxes may also provide incentives to gift shares, changing the executives' equity holdings.…”

Section: Executive Tradingmentioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

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646

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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Section: Executive Tradingmentioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

Self Cite

2,052

646

View full text Add to dashboard Cite

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“…When the shares are not disposed of immediately, he finds evidence of both timing and the backdating of the exercise date, though the incidence of backdating was reduced by the Sarbanes‐Oxley (SOX) Act of 2002. Dhaliwal, Erickson, and Heitzman (2009) find evidence that exercises were backdated to days with low closing stock prices in the pre‐SOX era. Cai (2007) finds similar evidence and concludes that 5% to 12% of exercises involve manipulation of dates or exercise prices.…”

Section: Previous Research On Stock Option Exercises and Insider Tmentioning

confidence: 77%

“…McDonald (2003) notes, however, that exercise in anticipation of a tax increase or moving to a higher tax bracket could be justified. The backdating issues referenced above from the papers by Cicero (2009), Dhaliwal, Erickson, and Heitzman (2009), and Cai (2007) consider the possibility that exercises without immediate disposition of the stock might be part of a tax‐minimization strategy and could induce manipulation of the exercise date, but given our focus only on exercises followed by sale of the stock, this issue would not be a concern 2…”

Section: Previous Research On Stock Option Exercises and Insider Tmentioning

confidence: 99%

Private Information and the Exercise of Executive Stock Options

Brooks¹,

Chance

Cline

2012

Financial Management

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This paper finds strong evidence that executives use private information when exercising their stock options. The most informed executives tend to exercise early, do not exercise on the vest date, do not exercise to capture dividends, exercise a high percentage of their options, and exercise when the option is the least in‐the‐money. We also find that exercises around resignation and retirement are followed by significant negative abnormal returns. Furthermore, the operating performance of firms following exercises motivated by private information is significantly worse than that of firms in which the exercises are not motivated by private information.

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“…She argues that these results provide evidence that option backdating is used mainly for retaining valuable employees, making it less subject to agency issues. In addition, Armstrong and Larcker () provide some behavioral explanations, other than a tax‐based rationale (Dhaliwal et al., ), for this practice. Formally, our Retention Hypothesis is as follows: H1: Firms backdate options to retain talented executives. …”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

What Drives Executive Stock Option Backdating?

Veld¹,

2014

Business Fin & Account

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We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight. We find that smaller, younger, and less profitable firms tend to be heavier involved in backdating. These results are consistent with the retention hypothesis. In line with the incentive hypothesis, we find that backdating occurs more for options that are out-of-the-money. We derive some evidence for the agency hypothesis, in the sense that backdating companies have a larger percentage of inside directors. However, contrary to this hypothesis, we conclude that backdating firms have better protection for minority shareholders compared to firms that do not backdate. JEL: G3

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Taxes and the backdating of stock option exercise dates

Cited by 50 publications

References 28 publications

A review of tax research

A review of tax research

Private Information and the Exercise of Executive Stock Options

What Drives Executive Stock Option Backdating?

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