The study, Remuneration and Incentives of Managers: Executive Stock Options and Backdating in Canada, examined stock options granted to executive by 66 of Canada's largest publicly traded companies from June 2003 through October 2006.
The authors found trading patterns that may be consistent with options backdating and that many options grants were not being reported as quickly as required.
A preliminary draft of the study notes:
While it is impossible to determine unequivocally that companies are engaging in backdating. . .the aggregate evidence certainly supports such a story.
The study found that unscheduled grants had a higher rate than scheduled grants of abnormally high returns.
The authors also found that reporting requirements regarding stock options were not being properly followed. Toronto Stock Exchange rules (See Toronto Stock Exchange Company Manual Sec. 613(h)(i), here) require that:
the exercise price for any stock options granted under a security based compensation arrangement or otherwise must not be lower than the market price of the securities at the time the option is granted.In other words, options must not be granted 'in the money.'
Moreover, Canadian securities regulations require that a company report all stock-option grants within 10 days of the grant. As a result of this long reporting period, companies may be setting the exercise price at the lowest point during a particular time period, giving the option recipients an immediate boost in the options' value.
The study analyzed more than 5,600 instances of stock-options granting. It found that 17% of reports for grants were filed after the 10-day window had expired, with 9% of those reports filed more than 50 days after the grant date.
The article was authored by Prof. Ryan A. Compton, Jonathon N. Giller, and Prof. Lindsay M. Tedds.
The D&O Diary also has a post on the study, here.
Daily Trivia: Of the 66 Canadian companies discussed in the study eight have been the subject of federal securities class actions since the passage of the PSLRA.
- ATI Technologies Inc. (twice)
- Barrick Gold Corp.
- Biovail Corp.
- Bombardier Inc.
- Cognos Inc.
- Inco Limited
- Kinross Gold Corp.
- Nortel Networks Corp. (twice)
- Cott Corp. (pre-PSLRA)