IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v32y2009i4p449-477.html
   My bibliography  Save this article

Backdating And Director Incentives: Money Or Reputation?

Author

Listed:
  • Kristina Minnick
  • Mengxin Zhao

Abstract

We investigate how director incentives affect the occurrence of firms' backdating employee stock options. Directors with more wealth tied up in stock options may pursue activities that lead to personal gain, such as option backdating, which potentially increases the option recipient's compensation. We document a positive and significant association between director option compensation and the likelihood that firms backdate stock options. Our results question the effectiveness of director option compensation in aligning the interests with those of shareholders and help to explain the recent decline in the use of director option grants by many firms.

Suggested Citation

  • Kristina Minnick & Mengxin Zhao, 2009. "Backdating And Director Incentives: Money Or Reputation?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(4), pages 449-477, December.
    • Handle: RePEc:bla:jfnres:v:32:y:2009:i:4:p:449-477
    DOI: 10.1111/j.1475-6803.2009.01257.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-6803.2009.01257.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-6803.2009.01257.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Brick, Ivan E. & Palmon, Oded & Wald, John K., 2006. "CEO compensation, director compensation, and firm performance: Evidence of cronyism?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 403-423, June.
    2. Yermack, David, 1997. "Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-476, June.
    3. Keith D. Harvey & Ronald E. Shrieves, 2001. "Executive Compensation Structure And Corporate Governance Choices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 495-512, December.
    4. Melissa B. Frye, 2004. "Equity‐Based Compensation for Employees: Firm Performance and Determinants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(1), pages 31-54, March.
    5. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    6. John Bizjak & Michael Lemmon & Ryan Whitby, 2009. "Option Backdating and Board Interlocks," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4821-4847, November.
    7. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    8. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    9. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    10. Lippert, Robert L & Moore, William T, 1994. "Compensation Contracts of Chief Executive Officers: Determinants of Pay-Performance Sensitivity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(3), pages 321-332, Fall.
    11. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    12. repec:bla:jfinan:v:59:y:2004:i:5:p:2281-2308 is not listed on IDEAS
    13. Robert L. Lippert & William T. Moore, 1994. "Compensation Contracts Of Chief Executive Officers: Determinants Of Pay-Performance Sensitivity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(3), pages 321-332, September.
    14. Ritter, Jay R, 1991. "The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    15. Gaver, Jennifer J. & Gaver, Kenneth M., 1993. "Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 125-160, April.
    16. Chauvin, Keith W. & Shenoy, Catherine, 2001. "Stock price decreases prior to executive stock option grants," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 53-76, March.
    17. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter.
    18. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
    19. Harford, Jarrad, 2003. "Takeover bids and target directors' incentives: the impact of a bid on directors' wealth and board seats," Journal of Financial Economics, Elsevier, vol. 69(1), pages 51-83, July.
    20. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
    21. Palia, Darius, 2001. "The Endogeneity of Managerial Compensation in Firm Valuation: A Solution," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 735-764.
    22. Erik Lie, 2005. "On the Timing of CEO Stock Option Awards," Management Science, INFORMS, vol. 51(5), pages 802-812, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Allan Hodgson & Michael Seamer & Katherine Uylangco, 2020. "Does stronger corporate governance constrain insider trading? Asymmetric evidence from Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2665-2687, September.
    2. Atul Gupta & Kristina Minnick, 2022. "Social capital and managerial opportunism: Evidence from option backdating," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 579-605, September.
    3. Engel, Pascal J. & Hack, Andreas & Kellermanns, Franz W., 2015. "Setting the right mix—Analyzing outside directors’ pay mix in public family firms," Journal of Family Business Strategy, Elsevier, vol. 6(2), pages 130-140.
    4. Timothy King & Jonathan Williams, 2013. "Bank Efficiency and Executive Compensation," Working Papers 13009, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    5. Ertimur, Yonca & Ferri, Fabrizio & Maber, David A., 2012. "Reputation penalties for poor monitoring of executive pay: Evidence from option backdating," Journal of Financial Economics, Elsevier, vol. 104(1), pages 118-144.
    6. Yangyang Chen & Cameron Truong & Madhu Veeraraghavan, 2015. "CEO Risk-Taking Incentives and the Cost of Equity Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 915-946, September.
    7. Compton, Ryan & Nicholls, Christopher C. & Sandler, Daniel & Tedds, Lindsay, 2011. "Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison," MPRA Paper 39789, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chris Veld & Betty H.T. Wu, 2014. "What Drives Executive Stock Option Backdating?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1042-1070, September.
    2. Ming‐Yuan Chen, 2010. "The Components Of Managerial Pay Adjustments And Their Impact On Firm Performance," Manchester School, University of Manchester, vol. 78(6), pages 582-608, December.
    3. Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky Directors," NBER Working Papers 12811, National Bureau of Economic Research, Inc.
    4. Ertimur, Yonca & Ferri, Fabrizio & Maber, David A., 2012. "Reputation penalties for poor monitoring of executive pay: Evidence from option backdating," Journal of Financial Economics, Elsevier, vol. 104(1), pages 118-144.
    5. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    6. Atul Gupta & Kristina Minnick, 2022. "Social capital and managerial opportunism: Evidence from option backdating," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 579-605, September.
    7. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    8. Carver, Brian T. & Cline, Brandon N. & Hoag, Matthew L., 2013. "Underperformance of founder-led firms: An examination of compensation contracting theories during the executive stock options backdating scandal," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 294-310.
    9. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
    10. Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky CEOs," NBER Working Papers 12771, National Bureau of Economic Research, Inc.
    11. Sun, Jerry & Cahan, Steven F. & Emanuel, David, 2009. "Compensation committee governance quality, chief executive officer stock option grants, and future firm performance," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1507-1519, August.
    12. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    13. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    14. Linxiao Liu & Harrison Liu & Jennifer Yin, 2014. "Stock Option Schedules and Managerial Opportunism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 652-684, June.
    15. Lehn, Kenneth & Patro, Sukesh & Zhao, Mengxin, 2008. "Determinants of the Size and Structure of Corporate Boards: 1935-2000," CEI Working Paper Series 2008-13, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    16. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    17. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Efendi, Jap & Srivastava, Anup & Swanson, Edward P., 2007. "Why do corporate managers misstate financial statements? The role of option compensation and other factors," Journal of Financial Economics, Elsevier, vol. 85(3), pages 667-708, September.
    19. van der Goot, Tjalling, 2010. "Is it timing or backdating of option grants?," International Review of Law and Economics, Elsevier, vol. 30(3), pages 209-217, September.
    20. Philippe Grégoire & Robert Glenn Hubbard & Michael F. Koehn & Marc Van Audenrode & Jimmy Royer, 2013. "Is backdating executive stock options always costly to shareholders?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 667-689, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfnres:v:32:y:2009:i:4:p:449-477. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.