Does backdating explain the stock price pattern
To address timing issues, we suggest an ex-post settlement device. Following the lead of the Private Securities Litigation Reform Act of 1995, we suggest that a look-back provision be implemented for tax-deductions for insider gifts of stock. The government, however, also has an interest in ensuring that gift tax exemptions are appropriately applied for those donations that will serve the public good. 2000) (“Legislators were apparently motivated in large part by a perceived need to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries”).
Many studies conclude that donations increase substantially as the availability of tax deductions increase.
The subsequent decline in stock price ensures that the value of the gift and thus the tax-deduction is not hurt by the bad news.
Unlike previous studies that use very limited sample of firms or very limited time periods, we investigate these motivations for the timing of gifts by utilizing a comprehensive database that includes all gifts of common stock where executives gift the stock of their own firms, in all publicly listed firms in the United States.
We find this pattern is stronger for late-reported gifts, which is consistent with the fraudulent backdating hypothesis.
We also find that almost two-thirds of gifts are reported late, taking advantage of an exception in the Sarbanes-Oxley Act of 2002 (SOX), further contributing to the lax regulatory conditions that make it easy to manipulate the timing of gifts.