Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating

67 Pages Posted: 10 Jul 2010 Last revised: 6 Sep 2011

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Fabrizio Ferri

Columbia Business School - Accounting, Business Law & Taxation

David A. Maber

Cal Poly

Date Written: June 22, 2011

Abstract

We study whether outside directors are held accountable for poor monitoring of executive compensation by examining the reputation penalties to directors of firms involved in the option backdating (BD) scandal of 2006-2007. We find that at firms involved in BD, significant penalties accrued to compensation committee members (particularly those who served during the BD period) both in terms of votes withheld when up for election, and in terms of turnover, especially in more severe cases of BD. However, directors of BD firms did not suffer similar penalties at non-BD firms, raising the question of whether reputation penalties for poor oversight of executive pay are large enough to affect the ex ante incentives of directors.

Keywords: Option Backdating, Director Labor Market, Shareholder Voting, Director Turnover, CEO Pay

Suggested Citation

Ertimur, Yonca and Ferri, Fabrizio and Maber, David A., Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating (June 22, 2011). Journal of Financial Economics (JFE), Forthcoming; 5th Annual Conference on Empirical Legal Studies Paper; AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1638216

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Fabrizio Ferri (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

David A. Maber

Cal Poly ( email )

Orfalea College of Business
San Luis Obispo, CA 93407
United States

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