Hot on the heels of Julie Creswell’s New York Times article on options backdating comes a report on the costs to shareholders as estimated by a new study expected to be published in the Michigan Law Review next year. That study, according to Eric Dash of the New York Times, was prepared by three University of Michigan researchers and reportedly concludes that while the backdating of stock options increased executive pay by an average of slightly more than 1%, the average decrease in market value was 8%. Put in terms of dollars, Dash reports that the study concludes, “For about $600,000 a year to the executives, shareholders are being put at risk to the tune of $500 million.”
Care should be exercised in reviewing the statistics, however, as Dash reports that the study employs several assumptions and limitations that may not be valid. For example, Dash notes that the study assumes that the stock prices of affected companies “would not recover” – an assumption that appears contrary to information in Ms. Creswell’s article. The study also apparently assumes that the options “were backdated over a 90-day period,” when in fact – as Ms. Creswell’s article explains – many of the options were backdated so long ago that statutes of limitation have run.
Eric Dash’s article, entitled “Report Estimates the Costs Of a Stock Options Scandal,” may be found in Section C. of the September 6, 2006 edition of the New York Times.