The executive is under no obligation to exercise, or use, the options, but if she decides to do so, the company must honor the contract.
If the company's stock goes up in price, the executive can exercise the options to buy stock at the strike price and then sell the shares at the market price, keeping the difference as profit.
In the context of mutual funds, a feature allowing fundholders to use an earlier date on a letter of intent to invest in a mutual fund in exchange for a reduced sales charge, e.g.
Giving retroactive value to purchases from the earlier date.
The broker then sells the shares, recovering the borrowed funds and depositing the difference in the executive's account.
The executive thereby avoids the inconvenience of raising the cash required to pay the strike price.
I show that after the introduction of the SOX and its implementation the practice of backdating options was substituted with the practice of “spring loading” options around analysts’ price targets announcements.Typically, an executive will sell the shares immediately upon exercise the option, often in the form of a cashless exercise.The executive takes the options to his broker, who loans the executive the funds to exercise the option.In the context of corporate governance, the illegal practice of setting the date of options awarded as part of executive compensation to a period when the stock price was very low (rather than setting the date of the options on the date the award was made).The act of dating a document before the date it was actually signed.The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample.