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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…

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

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Article
Publication date: 19 June 2017

Abiot Mindaye Tessema, Samy Garas and Kienpin Tee

The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry…

Abstract

Purpose

The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry among investors in the Gulf Cooperation Council (GCC) member countries. In addition, the paper investigates whether the influence of IFSB-4 on information asymmetry varies between Islamic and conventional financial institutions.

Design/methodology/approach

The paper tests the hypotheses using a sample of firms listed in the GCC over a period of 2000-2013. Ordinary least square regression and fixed-effects estimation techniques are applied to test the hypotheses.

Findings

The findings reveal that information asymmetry among investors is lower after the implementation of IFSB-4 than before, indicating that the standard has increased transparency. The results also reveal that information asymmetry after the implementation of IFSB-4 is lower for Islamic than for conventional financial institutions. This suggests that IFAB-4 promotes more transparency for Islamic than conventional institutions.

Research limitations/implications

Owing to data availability, we were unable to use other proxies of information asymmetry, e.g. bid-ask spreads, and the level of disclosure, e.g. self-constructed disclosure index.

Practical implications

The paper concludes that disclosures under IFAB-4 reduce information asymmetry among investors. In this context, this study increases the awareness of standard setters academics investors regulators and many other stakeholders about the economic consequences of disclosure standards in the region.

Originality/value

This study takes a first step to fill evident gaps in the literature by investigating the influences of disclosure standard on information asymmetry in a unique setting that is often ignored by accounting researchers, which helps to widen our knowledge on accounting practices across the globe.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

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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…

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

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