Remember backdating? The Journal wrote it a couple years back and got everyone riled up. The government launched all kinds of investigations, and then it turned out to be sort of a flop.
Today the paper is running another piece on how executives enrich themselves. This time it’s about executives use of prepaid variable forward contracts — basically contracts that allow them to lock in certain profits on their shares, while also participating in some of the upside.
The contracts are voluntarily made between an executive and a brokerage firm, but the claim (which was first made in April by the firm Gradient Analytics) is that these deals frequently proceed declines in the stock price.
One trend that could help explain the results: Executives often enter such deals when their company’s stock has been rising, research suggests, and so may be due for a fall. But researchers say they accounted for that phenomenon and concluded the price declines in these cases were statistically significant.
A report by Gradient, released to clients in April and reviewed by The Wall Street Journal, showed that shares of companies whose executives entered into these hedging contracts fell about 8% more than a peer group of similar companies about a year after the contracts were entered into. The report covers 474 contracts spread over 363 firms from 1996 and 2006.
One difference between this and backdating is that this isn’t so new — others have been looking into it as well, but in an academic setting. And some companies, like Pitney-Bowes apparently, have apparently banend the practice, likening it to betting against one’s company (though so is selling stock at all arguably).
An interesting test, perhaps, would be to compare the chart on the right to a chart that looks at stock movements before and after periods of heavy insider selling. If it’s much different, that might raise some alarm bells.
So even though this appears to be old(ish) news, now the paper is pushing it into the public, and that’s where regulators get their next ideas about prosecutions and investigations. You know, just in case there’s a dearth of things to investigate these days.