Little guidance exists on backdating, notwithstanding its pervasiveness, the complexity of determining its propriety, and the serious consequences of a misjudgment.
An in-depth examination of the day-to-day backdating issues that most business lawyers face cannot be found in the literature. This Article explains the different meanings of backdating, explores the reasons why it is difficult to distinguish legitimate backdating from improper backdating, examines the impact of disclosure on the propriety of backdating, and develops an analytical approach to assist business lawyers in wrestling with the difficult situations most will confront in their daily practices.
This mixture of motivations and constraints makes it is hard to decipher the information content of insider trades, especially because different trades may be intended to exploit news arriving at short or long horizons.
This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital.
Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here.) In trading their firms’ stocks, insiders must balance the profits of informed trading before news, the scrutiny by regulators that such trading can engender, formal policy restrictions by firms of insider trading activities, and diversification and liquidity motivations for selling shares after vesting of equity-based compensation.
By illuminating the subject, it is hoped that this Article will begin a much needed dialogue about backdating.
Backdating is a much misunderstood and largely unexplored subject.
It involves a wide range of conduct, some of which is an integral part of everyday law practice. The propriety of backdating, however, depends upon its purpose and effect.