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The economic consequences of ceasing option backdating

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  • Szu-fan Chen

    (The Hong Kong University of Science and Technology)

Abstract

The 2002 enactment of Section 403(a) of the Sarbanes-Oxley Act (SOX403) made option backdating less viable for firms. I examine whether the loss of the benefits obtained from option backdating is associated with more fraud after the enactment of SOX403. For firms suspected of backdating options (suspect firms), I find an increase in fraudulent financial reporting after the enactment of SOX403. The increase in fraud is more prominent for suspect firms more affected by SOX403. I also find an increase in insider trading profits from fraud for individuals who formerly benefited from option backdating. My study highlights an unintended consequence of SOX403. The opportunistic timing of executive option compensation appears to be replaced with fraudulent activities that are likely more value-destroying.

Suggested Citation

  • Szu-fan Chen, 2023. "The economic consequences of ceasing option backdating," Review of Accounting Studies, Springer, vol. 28(4), pages 2039-2074, December.
    • Handle: RePEc:spr:reaccs:v:28:y:2023:i:4:d:10.1007_s11142-022-09681-5
    DOI: 10.1007/s11142-022-09681-5
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    Keywords

    Securities regulation; Financial reporting fraud; Option backdating; Insider trading;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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