Easy Money: Managerial Power and the Option Backdating Game Revisited
25 Pages Posted: 25 Jun 2013
Date Written: June 24, 2013
This paper develops a model of a firm that backdates the granting of executive stock options in order to maximize actual compensation for a given level of reported compensation. The model is used to estimate the magnitude of the difference between the actual and reported values of option grants. Our estimates reveal that, although the Sarbanes-Oxley Act has reduced the likelihood of very large differentials, SOX has had a relatively minor impact on the average differential. The model predicts that SOX has lowered the reported values of option grants at firms where the board views relieving pressure from the CEO and relieving pressure from shareholders as strong substitutes, and raised reported values at firms where the board views these as weak substitutes. In both cases, the magnitude of the effect of SOX on reported pay is smaller for firms with strong CEOs.
Keywords: option backdating, executive compensation, managerial power hypothesis, Sarbanes-Oxley Act
JEL Classification: G34, D81, J33, K22, M52
Suggested Citation: Suggested Citation