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Article
Publication date: 8 May 2018

Kienpin Tee and Marilyn Wiley

The 2008-2009 subprime mortgage crisis in the USA caused bankruptcies and closures of many financial institutions. Yet many CEOs of US financial institutions were awarded huge…

Abstract

Purpose

The 2008-2009 subprime mortgage crisis in the USA caused bankruptcies and closures of many financial institutions. Yet many CEOs of US financial institutions were awarded huge bonuses and pay packages despite the economic collapse, suggesting that their incomes were not in conjunction with those of the shareholders, indicating a serious agency problem. This issue raises the question as to whether stock option backdating, another example of an agency problem, was as prevalent as slack lending policies among these financial institutions. This paper aims to compare the relative magnitude of executive option backdating in financial and nonfinancial firms.

Design/methodology/approach

Using a sample of CEO stock option grants from 1995 to 2006, obtained from ExecuComp, the authors employ an event study around the grant dates of executive options. The authors compare the abnormal price movements between financial and nonfinancial firms.

Findings

The abnormal negative stock returns were found before the award dates for both groups of firms. The after-event abnormal returns of both groups of firms, however, show different trends. For nonfinancial firms, there is an immediate turnaround of the abnormal return movement right after the grants; that is, the price increases, indicating the occurrence of significant backdating events. For financial firms, however, there is no significant price rebound after the grant date. In fact, the price continued to decline throughout the after-event period.

Research limitations/implications

The result shows that nonfinancial firms demonstrate significantly more option backdating behavior than financial firms.

Practical implications

The findings suggest that previous findings on prevalent backdating among all public listed firms are only partially correct. This paper shows that backdating behavior found in previous studies is indeed driven by nonfinancial firms. This unexpected finding contradicts the initial prediction of authors that option backdating may be more likely among financial firms.

Originality/value

Based on previous research, the authors recognize that generally the official grant dates of firms must have been set retroactively, as shown by Lie (2005). The findings, however, show that financial firms demonstrate only partial backdating behavior. This study opens a path for future research to further discover why financial firms exhibit less backdating behavior compared with nonfinancial firms, and if option backdating is not an issue for financial firms, why the share prices of these firms decline significantly prior to the grant date.

Details

Journal of Financial Crime, vol. 25 no. 2
Type: Research Article
ISSN: 1359-0790

Keywords

Book part
Publication date: 24 June 2011

David Shichor, Henry N. Pontell and Gilbert Geis

The illegal backdating of stock options has been studied by economists and lawyers, but totally neglected by criminologists. We examine three cases in order to convey a sense of…

Abstract

The illegal backdating of stock options has been studied by economists and lawyers, but totally neglected by criminologists. We examine three cases in order to convey a sense of how backdating has played out in practice, and consider the results of empirical research that has been published on the subject. Traditional legal analyses, mostly by law students, have detailed the statutory history and standing of the law regarding stock options. Economic writings focus almost exclusively on structural features that may correlate with outcomes. The failure of financial writers to carefully distinguish between criminal and noncriminal backdating is in part a consequence of the limited theoretical interpretations in their field beyond cost–benefit analysis and rational choice calculations. Criminologists, while having a plethora of theoretical constructs that might be applied to backdating, generally have no training to allow them to comprehend the arcane elements of economic criminal behavior. We conclude that more multidisciplinary attention is necessary to overcome the current pigeonholing of research approaches that limits both understanding of illegally backdated stock options and effective policies designed to prevent it.

Details

Economic Crisis and Crime
Type: Book
ISBN: 978-0-85724-801-5

Book part
Publication date: 27 October 2020

Nana Y. Amoah, Isaac Bonaparte, Ebenezer K. Lamptey and Muni Kelly

Using the L. Bebchuk, Cohen, and Ferrell (2009) entrenchment index (E-index), the authors examine the relation between management entrenchment and the probability of a firm being…

Abstract

Using the L. Bebchuk, Cohen, and Ferrell (2009) entrenchment index (E-index), the authors examine the relation between management entrenchment and the probability of a firm being implicated in the stock option backdating scandal. The authors conduct the analysis of this study using logistic regression, and they document a negative relation between the E-index and the probability of a firm being implicated in the stock option backdating scandal. The results of this study are consistent with the view that management entrenchment is advantageous to shareholders as it protects managers from short-term reporting pressures and egregious opportunistic behavior that can be detrimental to firm value.

Details

Resistance and Accountability
Type: Book
ISBN: 978-1-83867-993-4

Keywords

Book part
Publication date: 19 April 2017

Pino G. Audia and Fiona Kun Yao

We study the spatial diffusion of stock backdating, an instance of corporate misconduct about which public information was virtually absent until 2005. Contrary to the findings of…

Abstract

We study the spatial diffusion of stock backdating, an instance of corporate misconduct about which public information was virtually absent until 2005. Contrary to the findings of Bizjack, Lemmon, and Whitby (2009), our results reveal that this “invisible” practice did not diffuse through board interlocks. Rather, stock backdating spread through geographic proximity: firms were more likely to backdate stock options to the extent that other firms located geographically close to them had done so. Lending support to the importance of localized interactions among members of the local business elite, the effect of geographical proximity was conditional on high levels of local board interlocks. Our findings regarding the differential impact of geographic proximity and board interlocks on the diffusion of this invisible practice are analogous to the diffusion pattern of controversial practices proposed by Davis and Greve (1997).

Details

Geography, Location, and Strategy
Type: Book
ISBN: 978-1-78714-276-3

Keywords

Article
Publication date: 13 July 2012

Andrew Trumble and Sean Pinder

The purpose of this paper is to test for managerial opportunism, specifically the backdating of executive options, in Australia.

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Abstract

Purpose

The purpose of this paper is to test for managerial opportunism, specifically the backdating of executive options, in Australia.

Design/methodology/approach

The paper analyses the return behaviour associated with a sample of 161 unscheduled options granted by Australian firms. Specifically, the authors test for differences between a subsample of grants that had late‐filed notices (and hence may be subject to backdating) versus those that had notices filed on‐time.

Findings

Consistent with backdating, it is found that these abnormal post‐grant returns persist for a sub‐sample of late‐filed grants but not for a sub‐sample of grants with same‐day filing. Furthermore – the authors find even stronger results for option grants made by firms with a history of late‐filing but for which no notice was filed with the Australian Securities Exchange. This paper is the first to demonstrate these effects in a setting subject to the IFRS requirement that the fair value (rather than the intrinsic value) of executive options be expensed.

Originality/value

This paper is the first to demonstrate these effects in Australia and further in a setting subject to the IFRS requirement that the fair value (rather than the intrinsic value) of executive options be expensed.

Details

Accounting Research Journal, vol. 25 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 14 October 2013

Hongyan Fang and David Whidbee

– The purpose of this paper is to provide evidence in support of incentive and retention-based explanations for backdating.

Abstract

Purpose

The purpose of this paper is to provide evidence in support of incentive and retention-based explanations for backdating.

Design/methodology/approach

The authors use matching-firm techniques and the bivariate logistic model.

Findings

Backdating firms tend to be younger and faster growing – the characteristics of firms with growing demand for skilled labor. Further, rather than experiencing poor performance, backdating firms tend to outperform matching firms in both prior- and post-backdating years.

Originality/value

The results suggest that backdating reflects a firm's demand for valuable employees rather than strictly a manifestation of agency problems, as evidenced by previous study.

Details

Managerial Finance, vol. 39 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 August 2017

Nana Y. Amoah, Anthony Anderson, Isaac Bonaparte and Susan Muzorewa

This study aims to examine the use of real activities manipulation by firms implicated in the stock option backdating scandal.

Abstract

Purpose

This study aims to examine the use of real activities manipulation by firms implicated in the stock option backdating scandal.

Design/methodology/approach

The real activity manipulation measures are as follows: abnormal R&D expense, abnormal SG&A expense, abnormal production cost and abnormal cash flow from operations. Using a sample of firms alleged to have backdated options during the period 1998-2006 and non-backdating one-on-one matched firms, a separate regression is run for each of the real activity manipulation measures (dependent variables) on backdating and other variables.

Findings

The authors report unusually low R&D and unusually low SG&A expenses among the backdating firms. They also find evidence of unusually high production costs among backdating firms compared to the matched firms.

Research limitations/implications

The findings imply that backdating firms are more aggressive in the use of real activities to manipulate earnings and the use of real activities appears to be opportunistic.

Originality/value

The study contributes to the literature by providing evidence of the use of real activities manipulation by firms under investigation for fraud. The authors also add to the debate on whether the use of stock options as part of compensation aligns the interest of management with the interest of shareholders.

Details

Review of Accounting and Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 2 October 2017

Kienpin Tee and Marilyn Wiley

Recent findings show that CEOs tend to backdate their stock option grants so that a past date on which the stock price was particularly low is picked to be the grant date. Using…

Abstract

Purpose

Recent findings show that CEOs tend to backdate their stock option grants so that a past date on which the stock price was particularly low is picked to be the grant date. Using cases now settled concerning a group of firms that were caught backdating, this paper aims to examine further whether backdating firms have higher levels of operating efficiency and corporate governance, lower levels of bankruptcy risk, more ability to increase shareholder wealth, and lower levels of market price risk. This paper also compares the characteristics of backdating firms during the pre-Sarbanes-Oxley Act of 2002 (SOX) and post-SOX periods.

Design/methodology/approach

This sample of backdater firms comprises those caught backdating who have settled their cases, according to data provided by Risk Metrics Group, a non-profit organization that keeps track of most securities class actions. A matched sample of 28 non-backdating, comparison-group firms was constructed to perform univariate and multivariate comparisons.

Findings

This study found that backdating firms on average have a higher price risk than non-backdating firms, and that increasing the percentage of shares owned by the major shareholders reduces the possibility of management conducting backdating activities.

Originality/value

No previous studies have used a sample of real backdating culprits. Previous studies have usually used likely backdating traits to identify a group of suspected backdaters. In contrast, the current study, by using a group of firms whose deliberate backdating behavior had led to lawsuits that have been settled in court, investigated the characteristics of known backdaters.

Details

Journal of Financial Crime, vol. 24 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 19 June 2007

Stephen Alexander, Warren Rissier and Susan Chun

The purpose of this paper is to describe the implications of two recent decisions in Ryan v. Gifford and In Re Tyson Foods, Inc. concerning stock options backdating

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Abstract

Purpose

The purpose of this paper is to describe the implications of two recent decisions in Ryan v. Gifford and In Re Tyson Foods, Inc. concerning stock options backdating, “spring‐loading,” and “bullet‐dodging.”

Design/methodology/approach

The paper summarizes the facts of the two cases, defines spring‐loading and bullet‐dodging, and explains how the court held in both cases that plaintiffs had sufficiently alleged demand futility, that directors of the two corporations had shown bad faith and breached their duty of loyalty, and that the doctrine of fraudulent concealment took precedence over the statute of limitations.

Findings

The paper finds that backdating of options is so egregious that board approval cannot meet the test of business judgment and there is a substantial likelihood of director liability. A director who intentionally uses inside knowledge not available to shareholders in order to enrich employees while avoiding shareholder‐imposed requirements cannot be said to be acting loyally and in good faith as a fiduciary. The best practice for companies is only to grant options that are in strict compliance with their shareholder‐approved option plans as well as applicable accounting, tax, and disclosure rules, and on either fixed‐in‐advance dates or when the companies' insiders would be free to trade.

Originality/value

The paper provides a thorough explanation of two of the most important court decisions to date on stock options backdating, spring‐loading, and bullet‐dodging.

Details

Journal of Investment Compliance, vol. 8 no. 2
Type: Research Article
ISSN: 1528-5812

Keywords

Abstract

Details

Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

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