Backdating of executive stock options: comparing financial and nonfinancial industries

Author:Kienpin Tee, Marilyn Wiley
Position:College of Business, Zayed University, Abu Dhabi, United Arab Emirates
Pages:518-526
SUMMARY

Purpose The 2008-2009 subprime mortgage 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 economic collapse, suggesting that their incomes were not in conjunction with 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 policies among these... (see full summary)

 
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Backdating of executive stock
options: comparing nancial and
nonnancial 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
nancial institutions. Yet many CEOs of US nancial 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 nancial institutions. This paper aims to compare the relative magnitude of executive option
backdatingin nancial and nonnancial rms.
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 nancial and nonnancialrms.
Findings The abnormal negative stock returns were found before the award dates for both groups of
rms. The after-event abnormal returns of both groups of rms, however, show different trends. For
nonnancialrms, there is an immediate turnaround of the abnormal return movementright after the grants;
that is, the price increases, indicating the occurrence of signicant backdating events. For nancial rms,
however, there is no signicant price rebound after the grant date. In fact, the price continued to decline
throughoutthe after-event period.
Research limitations/implications The result shows that nonnancial rms demonstrate
signicantlymore option backdating behavior than nancial rms.
Practical implications The ndings suggestthat previous ndings on prevalent backdatingamong all
public listed rms are only partially correct.This paper shows that backdating behavior found in previous
studies is indeed driven by nonnancial rms. Thisunexpected nding contradicts the initial prediction of
authors thatoption backdating may be more likely among nancial rms.
Originality/value Based on previous research, the authors recognize that generally the ofcial grant dates
of rms must have been set retroactively,as shown by Lie (2005).Thendings,however, show that nancial rms
demonstrate only partial backdating behavior. This study opens a path for future research to further discover why
nancial rms exhibit less backdating behavior compared with nonnancialrms, and if option backdating is not
an issue for nancial rms,why the share prices of these rms decline signicantly prior to the grant date.
Keywords Executive compensation, Backdate, Financial institution, Nonnancial rms
Paper type Research paper
Introduction
Stock options are granted to executives so that they have the right to buy a stock at a xed
exercise price sometime after the option grant. The initial aim of the grant is to align the
JEL classication 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

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