The Economic Consequences of Ceasing Option Backdating

Review of Accounting Studies, Forthcoming

56 Pages Posted: 7 Dec 2021 Last revised: 7 Mar 2022

Date Written: December 4, 2021

Abstract

The 2002 enactment of Section 403(a) of the Sarbanes-Oxley Act (SOX403) made option backdating less viable for firms. I examine whether the loss of the benefits obtained from option backdating is associated with more fraudulent activities after the enactment of SOX403. For firms suspected of engaging in option backdating (suspect firms), I find an increase in fraudulent financial reporting after the enactment of SOX403. The increase in fraud is more prominent for suspect firms more affected by SOX403. I also find an increase in insider trading profits from fraud for individuals who formerly benefited from option backdating. My study highlights an unintended consequence of SOX403. The opportunistic timing of executive option compensation appears to be replaced with fraudulent activities that are likely more value-destroying.

Keywords: securities regulation, financial reporting fraud, option backdating, insider trading

JEL Classification: G18, G34, K22

Suggested Citation

Chen, Szu-fan, The Economic Consequences of Ceasing Option Backdating (December 4, 2021). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3978262 or http://dx.doi.org/10.2139/ssrn.3978262

Szu-fan Chen (Contact Author)

National Taiwan University ( email )

No.1, Section 4
Roosevelt Road
Taipei, 106
Taiwan

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