Option Grant Backdating Investigations and Capital Market Discipline

30 Pages Posted: 25 Mar 2008 Last revised: 14 May 2014

Kenneth A. Carow

Indiana University - Kelley School of Business - Department of Finance

Randall A. Heron

Indiana University - Kelley School of Business

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Robert Neal

Indiana University - Kelley School of Business

Abstract

Using a large sample of option granting firms, some of which were investigated for option grant backdating, we develop a predictive model for such investigations and examine how the capital market responded as the backdating scandal unfolded. Firms that were investigated experienced significant stock price declines from the beginning of the Wall Street Journal’s Perfect Payday series through the end of 2006. Firms predicted to have backdating problems, but not the subject of publicly revealed investigations, experienced stock price performance during the same period that was remarkably similar to that of firms with publicly revealed investigations. In contrast, firms not predicted to have backdating problems experienced normal stock price performance. Our results suggest that capital markets disciplined companies with suspicious option grant histories, often prior to, and irrespective of, any public revelation of an investigation into the matter.

Keywords: stock option, backdating

JEL Classification: G14, G18

Suggested Citation

Carow, Kenneth A. and Heron, Randall A. and Lie, Erik and Neal, Robert, Option Grant Backdating Investigations and Capital Market Discipline. Journal of Corporate Finance, August 12, 2009. Available at SSRN: https://ssrn.com/abstract=1108192

Kenneth A. Carow

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
317-274-2783 (Phone)
317-274-3312 (Fax)

Randall A. Heron

Indiana University - Kelley School of Business ( email )

Kelley School of Business
801 W. Michigan Street
Indianapolis, IN 46202
United States
317-274-4984 (Phone)

Erik Lie

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Robert Neal (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan
Indianapolis, IN 46202
United States
317-274-3348 (Phone)
317-274-3312 (Fax)

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