The Economic Impact of Backdating of Executive Stock Options

Abstract

The paper discusses the economic impact of legal, corporate governance, tax, disclosure, and incentive issues arising from revelation of dating games with regard to executive option grant dates. It provides an estimate of the value loss incurred by shareholders of firms implicated in backdating and compares it to the potential gain that executives might have obtained through backdating. Using a sample of firms that have already been implicated in backdating, we find that the revelation of backdating results in an average loss to shareholders of about 8%. This translates to about $500 million dollars per firm. By contrast, we estimate that the average potential gain from backdating to all executives in these firms is under $600,000 per firm annually. We suggest some remedies for not only backdating, but also for other dubious practices such as springloading.

Keywords: Executive compensation, Stock options, Corporate governance, Backdating

JEL Classification: G30, G34, G38, J33, M41, M45, K22, K42