Some research shows that the price of stock is likely to fall in the days leading up to the fixing ofthe exercise price for employee stock options. It is suggested that the price decreases are the resultof selective news releases from managers. Specifically, managers are asserted to delay the releaseof good news until after the ESO grant date and, instead, selectively release bad news before thedate that the stock option exercise price is fixed.

Required:

a. Why do you believe managers are willing to announce bad news but not good news in advance of the stock optiongrant date?

b. How might you adjust your reaction to news announcements (or lack thereof) around the date when employeestock option exercise prices are set?

c. Recent evidence suggests a more sinister explanation for this phenomenon. Specifically, companies were choosing to "backdate" the ESO grants so that they were granted at the lowest price during the period. Comment onthe ethics of such a practice. Who were those who benefited and lost from this arrangement?