Spread of options backdating

Posted by / 19-Jan-2020 14:10

Spread of options backdating

The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample.Our analysis provides new insight into how boards function and the role that they play in providing managerial oversight and determining corporate strategy.We focus on the role that director interlocks played in contributing to the spread of backdating since the board of directors has primary authority over the level and structure of executive compensation, including determination of the amount and timing of option grants.We find strong evidence that board interlocks are related to the spread of backdating.We find that a firm is more likely to begin backdating option grants if the firm has a director who is a board member of another firm that previously backdated its stock options.Our results are both statistically and economically significant.

Besides backdating, the practices include spring-loading, or releasing positive news about the company just prior to the option grant date, and bullet-dodging, releasing negative news just after the option grant date.By continuing to use this site, you consent to the use of cookies.We use cookies to offer you a better experience, personalize content, tailor advertising, provide social media features, and better understand the use of our services.The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.

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Firms with higher stock-price volatility are more likely to start to backdate options, which is consistent with the fact that higher stock-price variation provides more opportunities to backdate options.

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