Backdating of executive stock options: comparing financial and nonfinancial industries
| DOI | https://doi.org/10.1108/JFC-01-2017-0001 |
| Date | 08 May 2018 |
| Pages | 518-526 |
| Published date | 08 May 2018 |
| Author | Kienpin Tee,Marilyn Wiley |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Backdating of executive stock
options: comparing financial and
nonfinancial industries
Kienpin Tee
College of Business, Zayed University, Abu Dhabi, United Arab Emirates, and
Marilyn Wiley
College of Business, University of North Texas, Denton, Texas, USA
Abstract
Purpose –The 2008-2009 subprimemortgage 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 economiccollapse, suggesting that their incomes were not in conjunctionwith 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 policiesamong
these financial institutions. This paper aims to compare the relative magnitude of executive option
backdatingin financial and nonfinancial firms.
Design/methodology/approach –Using a sample of CEO stock option grants from 1995 to 2006,
obtained from ExecuComp, the authorsemploy an event study around the grant dates of executive options.
The authorscompare the abnormal price movements between financial and nonfinancialfirms.
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
nonfinancialfirms, there is an immediate turnaround of the abnormal return movementright 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
throughoutthe after-event period.
Research limitations/implications –The result shows that nonfinancial firms demonstrate
significantlymore option backdating behavior than financial firms.
Practical implications –The findings suggestthat previous findings on prevalent backdatingamong all
public listed firms are only partially correct.This paper shows that backdating behavior found in previous
studies is indeed driven by nonfinancial firms. Thisunexpected finding contradicts the initial prediction of
authors thatoption 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).Thefindings,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 nonfinancialfirms, 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.
Keywords Executive compensation, Backdate, Financial institution, Nonfinancial firms
Paper type Research paper
Introduction
Stock options are granted to executives so that they have the right to buy a stock at a fixed
exercise price sometime after the option grant. The initial aim of the grant is to align the
JEL classification –G14, G20, G30, M12, M40
JFC
25,2
518
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 518-526
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2017-0001
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
To continue reading
Request your trial