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Reputation penalties for poor monitoring of executive pay: Evidence from option backdating

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  • Ertimur, Yonca
  • Ferri, Fabrizio
  • Maber, David A.
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    Abstract

    We study whether outside directors are held accountable for poor monitoring of executive compensation by examining the reputation penalties to directors of firms involved in the option backdating (BD) scandal of 2006–2007. We find that, at firms involved in BD, significant penalties accrued to compensation committee members (particularly those who served during the BD period) both in terms of votes withheld when up for election and in terms of turnover, especially in more severe cases of BD. However, directors of BD firms did not suffer similar penalties at non-BD firms, raising the question of whether reputation penalties for poor oversight of executive pay are large enough to affect the ex ante incentives of directors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 104 (2012)
    Issue (Month): 1 ()
    Pages: 118-144

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    Handle: RePEc:eee:jfinec:v:104:y:2012:i:1:p:118-144

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Option backdating; Director labor market; Shareholder voting; Director turnover; Corporate governance;

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    References

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    Cited by:
    1. Brochet, Francois & Srinivasan, Suraj, 2014. "Accountability of independent directors: Evidence from firms subject to securities litigation," Journal of Financial Economics, Elsevier, vol. 111(2), pages 430-449.
    2. Masulis, Ronald W. & Mobbs, Shawn, 2014. "Independent director incentives: Where do talented directors spend their limited time and energy?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 406-429.
    3. Carver, Brian T. & Cline, Brandon N. & Hoag, Matthew L., 2013. "Underperformance of founder-led firms: An examination of compensation contracting theories during the executive stock options backdating scandal," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 294-310.

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