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Scandal Enforcement at the SEC: Salience and the Arc of the Option Backdating Investigations

Stephen J. Choi

New York University School of Law

Adam C. Pritchard

University of Michigan Law School

Anat Carmy Wiechman

New York University (NYU)

March 6, 2012

We study the impact of scandal-driven media scrutiny on the SEC’s allocation of enforcement resources. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating. We find that as the level of media scrutiny of option backdating increased, the SEC shifted its mix of investigations significantly toward backdating investigations and away from investigations involving other accounting issues. We test the hypothesis that SEC pursued more marginal investigations into backdating as the media frenzy surrounding the practice persisted at the expense of pursuing more egregious accounting issues that did not involve backdating. Our event study of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period. We also find that later backdating investigations are less likely to target individuals and less likely to accompanied by a parallel criminal investigation. Looking at the consequences of the SEC’s backdating investigations, later investigations were more likely to be terminated or produce no monetary penalties. We find that the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that attracted SEC investigations.

Number of Pages in PDF File: 58

Keywords: Option backdating, SEC enforcement

JEL Classification: K22, K23

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Date posted: July 5, 2011 ; Last revised: March 7, 2012

Suggested Citation

Choi, Stephen J. and Pritchard, Adam C. and Wiechman, Anat Carmy, Scandal Enforcement at the SEC: Salience and the Arc of the Option Backdating Investigations (March 6, 2012). Available at SSRN: http://ssrn.com/abstract=1876727 or http://dx.doi.org/10.2139/ssrn.1876727

Contact Information

Stephen J. Choi
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Adam C. Pritchard (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

Anat Carmy Wiechman
New York University (NYU) ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
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References:  33
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