Corporate governance stock option backdating

22-Nov-2015 08:02

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The forced turnover rates for CEOs and CFOs are similar and several times higher than normal.

The displaced managers are further punished by the managerial labor market, as they are much less likely than control firm managers to be rehired at comparable positions.

Finally, we find that CEOs of backdating firms receive a significantly higher level of total compensation than their counterparts in non-backdating firms after controlling for economic determinants of executive pay, and that the predicted excess compensation arising from the board and ownership structure variables has a more negative association with future firm performance for backdating firms relative to non-backdating firms.

The evidence is consistent with backdating firms having greater agency problems that negatively affect shareholder value.

Moreover, the tendency to backdate is stronger when stock options are more important in CEO compensation and when directors receive option grants on the same date as the CEO.

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We also find that backdating firms restructure CEO compensation to rely less on stock options.Finally, we learn the higher turnover extends to the General Counsel.ABSTRACT: We find the likelihood of forced turnover in the CEO and CFO positions is significantly higher in the aftermath of option backdating than in propensity-score-matched control firms.Forced turnover occurs in about 36 percent of the accused firms.

This paper investigates whether weak corporate governance is a contributing factor to the incidence of backdating executive stock option awards.

Based on a sample of S&P 1500 firms that exhibit evidence of backdating, we find that firms with weaker governance structures that allow CEOs to exercise greater power over the board and its compensation committee are more likely to engage in CEO option backdating.

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