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: Suggested Citation