Option backdating board interlocks
We also find that a firm is more likely to begin to backdate option awards if directors concurrently receive a stock option grant.
In addition, we identify several other firm and governance characteristics that are associated with the adoption of option backdating.
retention, incentives, attraction of talent) and with reference to the behavior of peer firms.
Unless these practices are perceived as clearly “outrageous,” it is unlikely that directors will be concerned about reputation costs.
As a result of this chumminess, corporate practices that otherwise might remain confined to just a few companies can spread quickly.
That appears to have been the case with the backdating of stock options, according to a new statistical study of publicly traded American companies.
"Firm Linkages to Scandals via Directors and Professional Service Firms: Insights from the Backdating Scandal," Journal of Business Ethics, Springer, vol. Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Shared auditors in mergers and acquisitions," Journal of Accounting and Economics, Elsevier, vol.
Our results are both statistically and economically significant.
Theoretical and empirical work suggests that directors suffer reputation penalties in the director labor market for poor monitoring. Fried in their book —is that there is little or no accountability for excessive or abusive pay practices.
However, it is unclear whether these penalties extend to poor monitoring of executive pay. However, no study has empirically examined this question.
We focus on the role that director interlocks played in contributing to the spread of backdating since the board of directors has primary authority over the level and structure of executive compensation, including determination of the amount and timing of option grants.
We find strong evidence that board interlocks are related to the spread of backdating.