What Drives Executive Stock Option Backdating?

Abstract

We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight. We find that smaller, younger, and less profitable firms tend to be heavier involved in backdating. These results are consistent with the retention hypothesis. In line with the incentive hypothesis, we find that backdating occurs more for options that are out-of-the-money. We derive some evidence for the agency hypothesis, in the sense that backdating companies have a larger percentage of inside directors. However, contrary to this hypothesis, we conclude that backdating firms have better protection for minority shareholders compared to firms that do not backdate. JEL: G3

Politically Connected Directors and Corporate Governance

“…All of the governance provisions are provided in the ISS/RiskMetrics data and the E Index is calculated from there. Prior studies that have used the Entrenchment Index as a proxy for corporate governance have shown that firms which score higher on the E Index are associated with lower creditor ratings, excessive CEO compensation, tax aggressiveness and lower firm valuations (see Alali et al, 2012;Brown & Caylor, 2006;Francis et al, 2013;Hoppe & Moers, 2011;Skantz, 2012;Veld & Wu, 2013).…”