Characteristics of real backdaters
| Pages | 541-551 |
| Date | 02 October 2017 |
| DOI | https://doi.org/10.1108/JFC-05-2016-0034 |
| Published date | 02 October 2017 |
| Author | Kienpin Tee,Marilyn Wiley |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Characteristics of real backdaters
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 –Recent findingsshow that CEOs tend to backdate their stockoption grants so that a past date on
which the stockprice was particularly low is picked to be the grantdate. 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 bankruptcyrisk, more
ability to increase shareholder wealth, and lower levels of market price risk. This paper also compares the
characteristicsof backdating firms during the pre-Sarbanes-OxleyAct of 2002 (SOX) and post-SOX periods.
Design/methodology/approach –This sample of backdater firms comprisesthose caught backdating
who have settledtheir cases, according to data provided by RiskMetrics Group, a non-profit organization that
keeps track of most securitiesclass actions. A matched sample of 28 non-backdating, comparison-groupfirms
was constructedto perform univariate and multivariate comparisons.
Findings –This study found that backdating firms on average have a higher price risk than non-
backdating firms, and thatincreasing the percentage of shares owned by the major shareholdersreduces the
possibilityof management conducting backdating activities.
Originality/value –No previous studies have used a sample of real backdatingculprits. Previous studies
have usually usedlikely backdating traits to identify a group of suspectedbackdaters. In contrast, the current
study, by using a group of firms whose deliberate backdatingbehavior had led to lawsuits that have been
settledin court, investigatedthe characteristics of known backdaters.
Keywords SOX, Corporate governance, Backdate, Characteristics of backdating firms,
Efficient contract
Paper type Research paper
Introduction
Stock options grantedto executives give them the right to buy stock at a fixed exerciseprice
sometime after the option grant. The initial aim of the grant is to align executives’interests
in the value of the firm with those of shareholders. Stock-option compensation rewards
executives for maximizing the difference between the exercise price of the options and the
stock price. Once the exercise price of the options is fixed, all price increases increase the
value of the option, which benefits the executive.Stock options, therefore, give executives an
interest in maximizingtheir firm’s long-term stock price.
There is an unintended incentive associated with executive stock options, however, around
the time the options are granted. The exercise price of the options is normally fixed at the market
price of the stock on the day the options are granted. As the exercise price of the option is the price
at which the executives may purchase the stock, executives have an incentive to temporarily
decrease the market price of the stock on the day of the option grant to decrease the exercise price.
Executive stock option backdating, picking a past date on which the stock price was
particularly low to be the grant date, represents a serious agency problem. Intentional
backdating and an accounting report that claims the options to have been issued on those
Characteristics
of real
backdaters
541
Journalof Financial Crime
Vol.24 No. 4, 2017
pp. 541-551
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2016-0034
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