The Effect of the Options Backdating Scandal on the Stock-Price Performance of 110 Accused Companies

19 Pages Posted: 19 Dec 2006

See all articles by Gennaro (帅纳) Bernile

Gennaro (帅纳) Bernile

University of Miami - Department of Finance

Gregg A. Jarrell

University of Rochester - Simon School

Howard Mulcahey

Forensic Economics

Date Written: December 21, 2006

Abstract

Since academic scholars and the Wall Street Journal reported widespread evidence indicating that option grants to executives were backdated, an avalanche of news stories followed documenting this ever-widening corporate scandal. In this study we ask: "How do disclosures of backdating affect shareholder value?" We closely examine 110 companies listed in the Wall Street Journal's Perfect Payday webpage, collecting all news stories related to options backdating. We find that shareholders of these 110 companies suffer on average significant stock-price declines, ranging between 20% and 50%. Moreover, these losses do not seem to be due to temporary overreactions (at least so far). The negative 20% abnormal return translates into total dollar losses of well over $100 billion. The negative 50% abnormal return translates to approximately one-quarter trillion dollars of lost shareholder value. There is no evidence that this decline is driven by temporary overreaction, judging by the average performance of these 110 companies over a nearly 2 year period. We are aware of no analysts, scholars or commentators predicting that such massive losses in shareholder value would result from options backdating problems.

Keywords: Executive stock option grants, Backdating, Agency Costs

JEL Classification: G12, J33, G34, G38, M52

Suggested Citation

Bernile, Gennaro (帅纳) and Jarrell, Gregg A. and Mulcahey, Howard, The Effect of the Options Backdating Scandal on the Stock-Price Performance of 110 Accused Companies (December 21, 2006). Simon School Working Paper No. FR 06-10. Available at SSRN: https://ssrn.com/abstract=952524 or http://dx.doi.org/10.2139/ssrn.952524

Gennaro (帅纳) Bernile (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Gregg A. Jarrell

University of Rochester - Simon School ( email )

Carol Simon Hall 4-110H
Rochester, NY 14627
United States
585-275-3914 (Phone)

Howard Mulcahey

Forensic Economics ( email )

Rochester, NY
United States

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