How Dr. Lie Uncovered Corporate Option Cheating

Yes the business school professor's real name is Dr. Lie (pronounced Lee - Norwegian). He studied corporate executive stock options and was not satisfied with the prevalent grant timing theory that executives granted themselves options before releasing good news.

So he examined the data and he found evidence of backdating. Now backdating is kinda like asking your stock broker to give you the stock you buy at the lowest price of the year. Here is what Lie says he found:

In a study that I started in 2003 and disseminated in the first half of 2004 and that was published in Management Science in May 2005, I found that stock prices also tend to decrease before the grants. Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below). By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase. This made me think about the possibility that some of the grants had been backdated. I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants. Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.
The summary posting by Dr. Lie is compelling and clear even to the layman. He finishes with some frequently asked questions that tell us 23% of executive stock option grants between 1996 and 2002 (when the reporting law was changed) were backdated. He also explains why most option cheaters are not caught.

So there are the metrics of our executive business morality. 77% honest. That's one reason why America is a (comparatively) great nation.

1 comment:

Anonymous said...

That was an interesting post.
It's kind of ironic that the iceberg photo you chose to include is somewhat of a "lie" itself.
(http://www.snopes.com/photos/natural/iceberg.asp )