Option Backdating and its Implications

GOVERNANCE AND EXECUTIVE COMPENSATION, William Forbes, ed., Edward Elgar Publishing, 2010

Washington and Lee Law Review, Vol. 65, pp. 853-886, 2008

UC Berkeley Public Law Research Paper No. 1118439

1 Pages Posted: 10 Apr 2008 Last revised: 24 Jun 2011

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: November 12, 2008

Abstract

Thousands of US companies appear to have secretly backdated stock options. This paper analyzes three forms of secret option backdating: (1) the backdating of executives' option grants; (2) the backdating of non-executive employees' option grants; and (3) the backdating of executives' option exercises. It shows that each type of backdating less likely reflects arm's-length contracting than a desire to inflate and camouflage executive pay. Secret backdating thus provides further evidence that pay arrangements have been shaped by executives' influence over their boards. The fact that so many firms continued to secretly backdate after the Sarbanes Oxley Act, in blatant violation of its reporting requirements, suggests recent reforms may have failed to adequately curb such managerial power.

Keywords: Executive compensation, stock options, corporate governance, managers, shareholders, CEOs, boards, camouflage, managerial power, Sarbanes Oxley, independent directors

JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14, M41, M49

Suggested Citation

Fried, Jesse M., Option Backdating and its Implications (November 12, 2008). GOVERNANCE AND EXECUTIVE COMPENSATION, William Forbes, ed., Edward Elgar Publishing, 2010; Washington and Lee Law Review, Vol. 65, pp. 853-886, 2008; UC Berkeley Public Law Research Paper No. 1118439. Available at SSRN: https://ssrn.com/abstract=1118439

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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