Easy Money? Managerial Power and the Option Backdating Game Revisited

34 Pages Posted: 25 Jun 2013 Last revised: 5 Jun 2020

See all articles by Graeme Guthrie

Graeme Guthrie

affiliation not provided to SSRN

Tom Stannard

University of Otago

Date Written: June 5, 2020

Abstract

This paper presents a model of a firm that backdates the granting of executive stock options in order to maximize actual compensation for a given level of reported compensation. The model is used to estimate the magnitude of the difference between the actual and reported values of option grants. Although the Sarbanes-Oxley Act has reduced the likelihood of very large differentials, it has had a relatively minor impact on the average differential. The magnitude of misreporting is higher, on average, when the share price is more volatile, the options vest earlier or have shorter lifetimes, or there is a longer window in which to grant the options. We analyze more than 36,000 option grants between 2003 and 2019 and find that firms with more to gain from strategic backdating, and in situations where there is likely to be less monitoring from independent directors, are more likely to exhibit behavior consistent with strategic backdating.

Keywords: option backdating, executive compensation, Sarbanes-Oxley Act

JEL Classification: G34, D81, J33, K22, M52

Suggested Citation

Guthrie, Graeme and Stannard, Tom, Easy Money? Managerial Power and the Option Backdating Game Revisited (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=2283974 or http://dx.doi.org/10.2139/ssrn.2283974

Graeme Guthrie (Contact Author)

affiliation not provided to SSRN

Tom Stannard

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

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