The Impact of the Options Backdating Scandal on Shareholders
Singapore Management University - Lee Kong Chian School of Business
Gregg A. Jarrell
University of Rochester - Simon School
June 1, 2008
Journal of Accounting & Economics (JAE), Vol. 47, No. 1, 2009
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, whereas relatively many firms become takeover targets. We believe this evidence is relevant to the ongoing debate about the economic relevance of seemingly inconsequential corporate misdeeds, in general, and option grants manipulation, in particular.
Number of Pages in PDF File: 57
Keywords: agency costs, event-study, backdating, corporate scandal
JEL Classification: G14, J33, M43Accepted Paper Series
Date posted: March 27, 2008 ; Last revised: November 12, 2013
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