IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v47y2009i1-2p2-26.html
   My bibliography  Save this article

The impact of the options backdating scandal on shareholders

Author

Listed:
  • Bernile, Gennaro
  • Jarrell, Gregg A.

Abstract

The revelation that scores of firms engaged in the illegal manipulation of stock options' grant dates (i.e. "backdating") captured much public attention. The evidence indicates that the consequences stemming from management misconduct and misrepresentation are of first-order importance in this context as shareholders of firms accused of backdating experience large negative, statistically significant abnormal returns. Furthermore, shareholders' losses are directly related to firms' likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications. And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced and relatively many firms become takeover targets.

Suggested Citation

  • Bernile, Gennaro & Jarrell, Gregg A., 2009. "The impact of the options backdating scandal on shareholders," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 2-26, March.
  • Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:2-26
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165-4101(08)00075-X
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, February.
    2. repec:bla:joares:v:32:y:1994:i:2:p:137-164 is not listed on IDEAS
    3. Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-476, June.
    4. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    5. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    6. Sanger, Gary C. & Peterson, James D., 1990. "An Empirical Analysis of Common Stock Delistings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(02), pages 261-272, June.
    7. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
    8. Bennedsen, Morten & Pérez-González, Francisco & Wolfenzon, Daniel, 2007. "Do CEOs Matter?," Working Papers 13-2007, Copenhagen Business School, Department of Economics.
    9. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
    10. Gillan, Stuart L. & Starks, Laura T., 2000. "Corporate governance proposals and shareholder activism: the role of institutional investors," Journal of Financial Economics, Elsevier, vol. 57(2), pages 275-305, August.
    11. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
    12. Sanjai Bhagat & John Bizjak & Jeffrey L. Coles, 1998. "The Shareholder Wealth Implications of Corporate Lawsuits," Financial Management, Financial Management Association, vol. 27(4), Winter.
    13. Romano, Roberta, 1991. "The Shareholder Suit: Litigation without Foundation?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(1), pages 55-87, Spring.
    14. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    15. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
    16. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    17. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 407-422, December.
    18. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    19. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    20. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    21. Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 581-611, September.
    22. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    23. Jay Dahya & John J. McConnell & Nickolaos G. Travlos, 2002. "The Cadbury Committee, Corporate Performance, and Top Management Turnover," Journal of Finance, American Finance Association, vol. 57(1), pages 461-483, February.
    24. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    25. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    26. Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky Directors," NBER Working Papers 12811, National Bureau of Economic Research, Inc.
    27. Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
    28. Kevin J. Murphy & Brian J. Hall, 2000. "Optimal Exercise Prices for Executive Stock Options," American Economic Review, American Economic Association, vol. 90(2), pages 209-214, May.
    29. Carpenter, Jennifer N & Remmers, Barbara, 2001. "Executive Stock Option Exercises and Inside Information," The Journal of Business, University of Chicago Press, vol. 74(4), pages 513-534, October.
    30. Yu, Fan, 2005. "Accounting transparency and the term structure of credit spreads," Journal of Financial Economics, Elsevier, vol. 75(1), pages 53-84, January.
    31. repec:bla:joares:v:23:y:1985:i:1:p:408-415 is not listed on IDEAS
    32. Fee, C. Edward & Hadlock, Charles J., 2004. "Management turnover across the corporate hierarchy," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 3-38, February.
    33. Chhaochharia, Vidhi & Laeven, Luc, 2007. "The Invisible Hand in Corporate Governance," CEPR Discussion Papers 6256, C.E.P.R. Discussion Papers.
    34. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    35. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
    36. Chauvin, Keith W. & Shenoy, Catherine, 2001. "Stock price decreases prior to executive stock option grants," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 53-76, March.
    37. Bonnier, Karl-Adam & Bruner, Robert F., 1989. "An analysis of stock price reaction to management change in distressed firms," Journal of Accounting and Economics, Elsevier, vol. 11(1), pages 95-106, February.
    38. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
    39. Bennedsen, Morten & Perez-Gonzalez, Francisco & Wolfenzon, Daniel, 2007. "Do CEOs matter?," CEI Working Paper Series 2006-21, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    40. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
    41. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    42. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
    43. Denis, David J & Denis, Diane K, 1995. " Performance Changes Following Top Management Dismissals," Journal of Finance, American Finance Association, vol. 50(4), pages 1029-1057, September.
    44. Khanna, Naveen & Poulsen, Annette B, 1995. " Managers of Financially Distressed Firms: Villains or Scapegoats?," Journal of Finance, American Finance Association, vol. 50(3), pages 919-940, July.
    45. Erik Lie, 2005. "On the Timing of CEO Stock Option Awards," Management Science, INFORMS, vol. 51(5), pages 802-812, May.
    46. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-017-9435-x is not listed on IDEAS
    2. Files, Rebecca, 2012. "SEC enforcement: Does forthright disclosure and cooperation really matter?," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 353-374.
    3. Chris Veld & Betty H.T. Wu, 2014. "What Drives Executive Stock Option Backdating?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1042-1070, September.
    4. Larcker, David F. & So, Eric C. & Wang, Charles C. Y., 2010. "Boardroom Centrality and Stock Returns," Research Papers 2061, Stanford University, Graduate School of Business.
    5. Ilona Babenko & Rik Sen, 2016. "Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans," Management Science, INFORMS, vol. 62(7), pages 1878-1898, July.
    6. Ertimur, Yonca & Ferri, Fabrizio & Maber, David A., 2012. "Reputation penalties for poor monitoring of executive pay: Evidence from option backdating," Journal of Financial Economics, Elsevier, vol. 104(1), pages 118-144.
    7. 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.
    8. Gupta, Atul & Misra, Lalatendu & Shi, Yilun, 2017. "Product-market competitiveness and investor reaction to corporate governance failures," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 134-147.
    9. Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
    10. Carow, Kenneth & Heron, Randall & Lie, Erik & Neal, Robert, 2009. "Option grant backdating investigations and capital market discipline," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 562-572, December.
    11. Dong, Zhiyong & Wang, Cong & Xie, Fei, 2010. "Do executive stock options induce excessive risk taking?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2518-2529, October.
    12. Vizcaíno, Marcos & Chousa, Juan P., 2016. "Analyzing the influence of the funds' support on Tobin's q using SEM and fsQCA," Journal of Business Research, Elsevier, vol. 69(6), pages 2118-2124.
    13. Eikseth, Hans Marius & Lindset, Snorre, 2011. "Backdating executive stock options--An ex ante valuation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1731-1743, October.
    14. Autore, Don M. & Hutton, Irena & Peterson, David R. & Smith, Aimee Hoffmann, 2014. "The effect of securities litigation on external financing," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 231-250.
    15. Bernile, Gennaro & Sulaeman, Johan & Wang, Qin, 2015. "Institutional trading during a wave of corporate scandals: “Perfect Payday”?," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 191-209.
    16. Biggerstaff, Lee & Cicero, David C. & Puckett, Andy, 2015. "Suspect CEOs, unethical culture, and corporate misbehavior," Journal of Financial Economics, Elsevier, vol. 117(1), pages 98-121.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:2-26. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jae .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.