Backdating of executive stock
options: comparing ﬁnancial and
College of Business, Zayed University, Abu Dhabi, United Arab Emirates, and
College of Business, University of North Texas, Denton, Texas, USA
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
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
Journalof Financial Crime
Vol.25 No. 2, 2018
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