Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating

52 Pages Posted: 11 Jan 2010

See all articles by Jennifer Li

Jennifer Li

Brock University

Fayez A. Elayan

Brock University-Goodman School of Business

Thomas O. Meyer

Southeastern Louisiana University - Department of Marketing and Finance

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Date Written: January 9, 2010

Abstract

Backdating occurs when a company retroactively changes option grant dates to dates when its stock was trading at a relatively low price. Firm announcements of backdating have lead to adverse publicity from the media and negative pronouncements from academics regarding the economic effects and motivation of those involved. This research finds that backdating signals to the capital markets that these firms have ineffective governance systems and poor internal controls. Further, nearly half of the backdating investigations show no backdating has occurred or that it was unintentional. This indicates negative media attention and unwarranted impact on share prices, in many cases.

Keywords: Backdating, Employee Stock Options, Corporate Governance, Internal Control

JEL Classification: M41, G34

Suggested Citation

Li, Jingyu and Elayan, Fayez A. and Meyer, Thomas Otto, Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating (January 9, 2010). CAAA Annual Conference 2010, Available at SSRN: https://ssrn.com/abstract=1533629 or http://dx.doi.org/10.2139/ssrn.1533629

Jingyu Li

Brock University ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

Fayez A. Elayan (Contact Author)

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Thomas Otto Meyer

Southeastern Louisiana University - Department of Marketing and Finance ( email )

SLU 10844
Hammond, LA 70402
United States
985-549-3103 (Phone)
985-549-5010 (Fax)

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