Capital Market Reactions to Option Backdating Probes

32 Pages Posted: 29 Jan 2007

See all articles by Sakshi Jain

Sakshi Jain

Tennessee Society of Certified Public Accountants (TSCPA)

Zabihollah Rezaee

University of Memphis - School of Accountancy

Date Written: January 2007

Abstract

The pervasiveness of option backdating practices has resulted in broad regulatory scrutiny, formal investigations by federal authorities and internal inquiries by more than 200 implicated companies. Prior studies (Yermack 1997; Aboody and Kasznik 2000; Lie 2005; Heron and Lie 2006) find a pattern of timing of stock option grants to influence stock prices. Option backdating happens when the actual grant dates are days, weeks, or months before or after their stated date. We investigate capital market reactions to backdating probe announcements for a sample of 180 implicated companies. We detect, on average, negative abnormal returns for implicated companies. We also find that the market reaction is more negative for companies that have higher stock price volatility, less effective corporate governance resulting in shareholder lawsuits or departure of their executives, and more leverage. These results have implications for public companies, policy makers, regulators, and the investing and academic communities, as more companies are being investigated by federal authorities and their corporate governance, financial reporting and management integrity are being scrutinized.

Keywords: stock option grants, backdating practices and probes, market reactions, corporate governance, financial reporting

JEL Classification: G12, G34, G38, M41, J33

Suggested Citation

Jain, Sakshi and Rezaee, Zabihollah, Capital Market Reactions to Option Backdating Probes (January 2007). Available at SSRN: https://ssrn.com/abstract=959827 or http://dx.doi.org/10.2139/ssrn.959827

Sakshi Jain

Tennessee Society of Certified Public Accountants (TSCPA) ( email )

201 Powell Place
Brentwood, TN 37027

Zabihollah Rezaee (Contact Author)

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

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