57 Pages Posted: 27 Mar 2008 Last revised: 12 Nov 2013
Date Written: June 1, 2008
The revelation that scores of firms engaged in the illegal manipulation of stock options' grant dates (i.e. "backdating") captured much public attention. The evidence indicates that the consequences stemming from management misconduct and misrepresentation are of first-order importance in this context as shareholders of firms accused of backdating experience large negative, statistically significant abnormal returns. Furthermore, shareholders' losses are directly related to firms' likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications. And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced, whereas relatively many firms become takeover targets. We believe this evidence is relevant to the ongoing debate about the economic relevance of seemingly inconsequential corporate misdeeds, in general, and option grants manipulation, in particular.
Keywords: agency costs, event-study, backdating, corporate scandal
JEL Classification: G14, J33, M43
Suggested Citation: Suggested Citation
Bernile, Gennaro and Jarrell, Gregg A., The Impact of the Options Backdating Scandal on Shareholders (June 1, 2008). Journal of Accounting & Economics (JAE), Vol. 47, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=971137 or http://dx.doi.org/10.2139/ssrn.971137