Corporate Governance and Backdating of Executive Stock Options

53 Pages Posted: 5 Oct 2006 Last revised: 18 Dec 2011

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Guojin Gong

Penn State University - Smeal College of Business

Haidan Li

Santa Clara University - Leavey School of Business

Date Written: January 28, 2009

Abstract

This paper investigates whether weak corporate governance is a contributing factor to the incidence of backdating executive stock option awards. Based on a sample of S&P 1500 firms that exhibit evidence of backdating, we find that firms with weaker governance structures that allow CEOs to exercise greater power over the board and its compensation committee are more likely to engage in CEO option backdating. Moreover, the tendency to backdate is stronger when stock options are more important in CEO compensation and when directors receive option grants on the same date as the CEO. We also find interlocking boards among backdating firms are associated with a higher incidence of backdating. Finally, we find that CEOs of backdating firms receive a significantly higher level of total compensation than their counterparts in non-backdating firms after controlling for economic determinants of executive pay, and that the predicted excess compensation arising from the board and ownership structure variables has a more negative association with future firm performance for backdating firms relative to non-backdating firms. The evidence is consistent with backdating firms having greater agency problems that negatively affect shareholder value.

Keywords: Corporate governance, Executive stock option compensation, Backdating

JEL Classification: G30, J33

Suggested Citation

Collins, Daniel W. and Gong, Guojin and Li, Haidan, Corporate Governance and Backdating of Executive Stock Options (January 28, 2009). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=934881 or http://dx.doi.org/10.2139/ssrn.934881

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Haidan Li (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

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