The Impact of the Options Backdating Scandal on Shareholders

57 Pages Posted: 27 Mar 2008 Last revised: 12 Nov 2013

Gennaro Bernile

University of Miami - School of Business Administration

Gregg A. Jarrell

University of Rochester - Simon School

Date Written: June 1, 2008

Abstract

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

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

Gennaro Bernile (Contact Author)

University of Miami - School of Business Administration ( email )

5250 University Dr
Coral Gables, FL 33146
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)

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