Abnormal stock returns, which are especially high immediately after being granted, happen either because they have been backdated or because the executives concerned have predicted with success the future direction of the market.
When the act came into effect in 2002, executives were required to report stock option grants within two days. This made backdating more difficult, though companies still managed to do so by missing the reporting deadline.
Comparing corporate behaviour before and after reveals that 80% of the abnormal stock option returns from grants disappear from the earlier to the later period. This suggests that most of the abnormal returns in the sample 2000-2002 were due to backdating.
The study also revealed that backdating is still taking place, albeit in smaller measure in spite of the new rules. To end it altogether, the SEC needs to enforce the two-day deadline.
Does backdating explain the stock price pattern around executive stock
Randall A Heron and Erik Lie
Journal of Financial Economics, Vol 83 Issue 2, February 2007