Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating
Fayez A. Elayan
Brock University-Goodman School of Business
Southeastern Louisiana University
January 15, 2010
Backdating occurs when a company retroactively changes option grant dates to dates when its stock was trading at a relatively low price. Firm announcements of backdating generated adverse media publicity and negative pronouncements from academics regarding the economic effects and motivation of those involved. We find evidence that management engages in backdating to generate motivational benefits for employees rather than enriching themselves. By not accounting for the outcomes of the investigations the economic impact of these events is overstated and unfairly portrays nearly half of the firms as guilty when they have not engaged in intentional backdating.
Number of Pages in PDF File: 52
Keywords: Backdating, Employee Stock Options, Corporate Governance, Internal Control
JEL Classification: M41
Date posted: April 22, 2010
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