Options Backdating: The Statistics of Luck

Part III of A NERA Insights Series
By Dr. Renzo Comolli, Dr. Branko Jovanovic, Dr. Patrick Conroy and Erik Stettler

Misconceptions about Backdating and Probability

In this article, we explain why:

• some patterns of option grants that may appear extremely unlikely are actually very likely;

• the calculations presented in the March 18, 2006 Wall Street Journal article can be misleading; and

• factors that were disregarded in published probability calculations may be especially important when estimating the likelihood of grants for specific companies.

Allegations of backdating typically involve a claim of practice by which companies look back to past stock prices and record option grants on a date prior to the actual date of the grants— a date in which the stock price was low.