Backdating and Director Incentive: Money or Reputation
36 Pages Posted: 10 Mar 2009
Date Written: March 9, 2009
This paper investigates how director incentives affect the occurrence of firms' backdating employee stock options. Directors with more wealth tied up in stock options may pursue activities that lead to personal gain, such as option backdating, which potentially increases the option recipient's compensation. We document a positive and significant association between director option compensation and the likelihood that firms backdate stock options. Our results question the effectiveness of director option compensation in aligning the interests with those of shareholders and help to explain the recent decline in the use of director option grants by many firms.
Keywords: option backdating, director compensation, pay-for-performance sensitivity
JEL Classification: G34, G30
Suggested Citation: Suggested Citation