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

52 Pages Posted: 22 Apr 2010  

Jennifer Li

Brock University

Fayez A. Elayan

Brock University-Goodman School of Business

Thomas Meyer

Southeastern Louisiana University

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 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 generated adverse media publicity and negative pronouncements from academics regarding the economic effects and motivation of those involved. We find evidence that management engages in backdating to generate motivational benefits for employees rather than enriching themselves. By not accounting for the outcomes of the investigations the economic impact of these events is overstated and unfairly portrays nearly half of the firms as guilty when they have not engaged in intentional backdating.

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

JEL Classification: M41

Suggested Citation

Li, Jennifer and Elayan, Fayez A. and Meyer, Thomas, Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating (January 15, 2010). Available at SSRN: https://ssrn.com/abstract=1593551 or http://dx.doi.org/10.2139/ssrn.1593551

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 Meyer

Southeastern Louisiana University ( email )

Hammond, LA 70402
United States

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