Impact of backdating

, we analyze the excess returns that occurred in short windows surrounding ten distinct news events related to backdating of stock option grants.

Our analysis focuses on 129 firms identified by the Wall Street Journal as implicated in the backdating scandal as of December 31, 2006.

Mawani, ―The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOs‖ (2000) vol.

Lie, ―On the Timing of CEO Stock Option Awards‖ (2005) vol.

Evidence from Stock Price Reversals Around Executive Option Grants‖, Working Paper, University of Michigan, Version: January 2005.

Seyhun, ―Effect of Sarbanes-Oxley Act on the Influence of Executive Compensation‖ Working Paper, University of Michigan, Version: March 2006M.

Overall, the evidence is consistent with the hypothesis that the loss of investors’ confidence in the firm’s management is a first-order determinant of the economic consequences resulting from the option backdating scandal.

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Murphy, ―The Trouble with Stock Options‖ (2003) vol. 3 Journal of Economic Perspectives 49-70; The Conference Board, The 2006 Top Executive Compensation Report (New York: The Conference Board, 2006). Walker, ―Unpacking Backdating: Economic Analysis and Observations On The Stock Option Scandal‖ (2007) vol. Melnitzer, ―Manipulation ‗Serious Problem‘‖, Financial Post, September 19, 2007. Petruno, ―In Options Backdating Scandal, Shareholders are Real Victims‖, Los Angeles Times, August 13, 2005. Yermack ―Good Timing: CEO Stock Option Awards and Company News Announcements‖ (1997) vol. The magnitude of the implied wealth changes seems too large to be attributed to any reasonable estimate of direct out-of-pocket costs of the backdating scandal or to the resulting legal penalties disclosed to date (direct cost hypothesis).Therefore, the alternative hypothesis we propose, which we broadly label Agency Hypothesis, is that a firm’s involvement in the backdating scandal has significant economic implications, despite its limited (direct) impact on cash flows.

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