The Impact of the Options Backdating Scandal on Shareholders

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

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

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 (帅纳) 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 (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)

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