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Chapter 8. Earnings Tricks and Games: Ma... > Red Flag 8: Beware of Companies That...

Red Flag 8: Beware of Companies That Use Risky Stock Hedging Strategies

When times are good and a stock price is riding high, it is difficult for a company to consider the risks it may face if there is a reversal. However, it is vital for investors that companies think the unthinkable because failure to do so can lead to a far uglier setback than could be caused by the economy or competition. This was the case with computer services giant Electronic Data Systems Corp. (EDS), which sold “put options” to investors when it was in a go-go period as a way to offset costs associated with employee stock option programs.


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