Companies A and B are very similar; stock in each was selling for $18 per share in March, but is now at $23 per share. Each company decides to issue options on 10,000 shares to its CEO with a strike price of $18; company B simply issues these options this way, acknowledging their issue date, but company A claims (falsely) to have issued them back in March. Do these actions get different accounting or tax treatment? Why would company A commit this apparently entirely useless fraud?
2006-07-19 16:32:13 · 3 answers · asked by dWj 1 in Business & Finance ➔ Investing
Violet: in fact, the company can pick any number it wants.
E-P: Is the intrinsic value at issue treated as earned income, and the rest of any benefit from exercise as a long-term capital gain?
This has nothing to do with expiration date. The two companies are issuing options with the same expiration date.
2006-07-19 17:00:58 · update #1
They give more money to the recipients of the options, and that money is favorably treated (capital gains) compared to wages.
Management has every reason to back-date options it gives itself. Stockholders probably feel differently, but they can only change it if they throw out the board of directors and only if they mount an (expensive) proxy battle.
2006-07-19 16:38:34 · answer #1 · answered by Engineer-Poet 7 · 1⤊ 0⤋
The strike price of an option is tied to the fair market value of the stock on the day the option is struck -- it's not a number the company can pick out of thin air. Companies that backdate their options are typically cherry-picking a date in the past when the price was low, thus making the options more valuable. The SEC frowns upon this practice.
2006-07-19 23:35:37 · answer #2 · answered by violet 5 · 0⤊ 0⤋
the only thing that changes is the expiration date forces the CEO to exercise his options in shorter time period limiting upside potential. (or downside)
2006-07-19 23:40:16 · answer #3 · answered by Norman 7 · 0⤊ 0⤋