This paper contrasts the post-tax returns of backdated at-the-money options to currently-dated in-the-money options (with the same strike price as the backdated options) and demonstrates that a Canadian executive can earn a significantly larger after-tax return from backdated options compared to a US executive.
We tie this to the favorable Canadian tax treatment of executive options relative to their treatment in the United States.
Sure the accounting rules are arcane and most people don't know them.
But if someone asks you to write down a date from a month ago on a legal document, rather than today's date, doesn't it give you pause?
The academics concluded that something funny was going on.
Untangling the causes of backdating will remain elusive unless each factor is considered in detail using evidence from different regimes. III 2009) (allowing carry forward for a credit for the prior year’s minimum tax liability that resulted from certain timing differences). D (illustrating in Example 4 the effect of AMT); see generally Francine J. 337 (2002) (providing a detailed discussion of the AMT and its application to ISOs). These reduced rates are currently effective until the end of 2012. 111-312, 124 Stat 3296 (extending reduced rates from the end of 2010 until the end of 2012).
Whenever I write about backdating, many people write in to tell me that backdating's not illegal; you just have to account for it correctly.
Since so many people think this is an important point, I thought I'd do a post addressing just that contention. What I assume people mean is that granting in-the-money options is not illegal, so long as you account for it properly. But the whole point of backdating is to pretend that you're not granting in-the-money options when in fact you are.
The first step in untangling the causes of backdating is to acknowledge that the backdating phenomenon must be driven by both supply and demand factors. Lipman, Incentive Stock Options and the Alternative Minimum Tax: The Worst of Time, 39 Harv. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub.
From the supply side, the question is what motivates a firm to grant a backdated option, and from the demand side, what motivates an executive to demand (or, at the very least, accept) a backdated option?