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That exercise price, or strike price, usually takes one of three forms: the closing price on the day of the grant; an average of the highs and lows of the day; or the closing price from the previous day.

The lower the strike price, the greater the potential for making money when exercising the options.

Zhang hopes their research can help stakeholders and the general public better understand how corporate boards respond to scandal.

The study was funded by Rice University and UC Irvine.

Subsequently, the Securities and Exchange Commission (SEC) took an interest, followed by the securities plaintiffs’ bar and many corporations. The practice of options backdating, apparently widespread from 1996 through 2002, is widely believed to have been short-circuited by the enactment of Sarbanes-Oxley in 2002.

The researchers examined the behavior of corporate boards following the 2006 stock-option backdating scandal, in which firms illegally manipulated stock-option grant dates.

“While it seems to be a natural choice to fire the executives/directors who should be responsible for option backdating, only one-third of the 141 firms we surveyed elected to do so.” Zhang and her co-author, Margarethe Wiersema at UC Irvine, theorize that the decrease in executive/director turnover over the course of the scandal can be attributed to companies using other companies’ similar misconduct to justify their own misconduct.

“Our findings suggest that corporate boards ‘strategize’ their response by calculating the reputation damage caused by scandal,” Zhang says.

Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.

Other similar practices are being reviewed by government officials as well.