Abstract

http://ssrn.com/abstract=1030907
 
 

References (36)



 
 

Citations (5)



 


 



Backdating Executive Stock Option Grants: An Agency Problem or Just Efficient Contracting?


Hamed Mahmudi


University of Oklahoma - Division of Finance; University of Toronto - Rotman School of Management

Huasheng Gao


Nanyang Technological University

August 2008

2008 Western Finance Association Conference Papers

Abstract:     
It is widely documented that managers tend to backdate their stock option grants so that a past date on which the stock price was particularly low is picked to be the grant date. Almost all of the current literature attributes the option backdating behavior exclusively to the agency problem which states that managers manipulate the terms of their option awards at the expense of shareholders. Our paper challenges this idea and demonstrates an alternative explanation for backdating. We show that backdating could be the consequence of efficient contracting that solves executive compensation problems. We first empirically document a rather strong but surprising evidence that better corporate governance is associated with more backdating. We then establish a theoretical model to explain this finding. The model predicts that managerial backdating benefits shareholders by (1) reducing the management compensation cost and (2) increasing managerial incentive. Using a large dataset, we provide strong empirical evidence supporting the model's predictions. Overall, our evidence supports the efficient contracting view of optionbackdating, and contradicts the prevalent agency explanation.

Number of Pages in PDF File: 60

Keywords: Option Timing, Backdating, Executive Compensation

JEL Classification: G32, J33

working papers series


Download This Paper

Date posted: February 6, 2008 ; Last revised: September 17, 2008

Suggested Citation

Mahmudi, Hamed and Gao, Huasheng, Backdating Executive Stock Option Grants: An Agency Problem or Just Efficient Contracting? (August 2008). 2008 Western Finance Association Conference Papers. Available at SSRN: http://ssrn.com/abstract=1030907 or http://dx.doi.org/10.2139/ssrn.1030907

Contact Information

Hamed Mahmudi (Contact Author)
University of Oklahoma - Division of Finance ( email )
Norman, OK 73019
United States
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
Huasheng Gao
Nanyang Technological University ( email )
S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore
HOME PAGE: http://www3.ntu.edu.sg/home/hsgao/
Feedback to SSRN


Paper statistics
Abstract Views: 4,631
Downloads: 459
Download Rank: 34,124
References:  36
Citations:  5

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.266 seconds