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Stock market reactions to regulatory investigations: Evidence from options backdating

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  • Jain, Sakshi
  • Jain, Pankaj
  • Rezaee, Zabihollah

Abstract

Option backdating practices have resulted in broad regulatory scrutiny, formal inquiries by federal authorities, and internal investigations by companies. In this paper, we investigate stock market reactions to option backdating probe announcements. For the 245 implicated companies, we detect negative abnormal stock returns, which are modest for internal investigation, larger for SEC probes, and the most severe for Department of Justice investigations. We also find that the market reaction is more negative for companies with higher stock price volatility, less effective corporate governance, and lower quality of financial statements. Results suggest that option backdating practices demonstrate weak corporate governance and financial reporting, and regulatory investigations of such practices are value-relevant as reflected in stock prices.

Suggested Citation

  • Jain, Sakshi & Jain, Pankaj & Rezaee, Zabihollah, 2010. "Stock market reactions to regulatory investigations: Evidence from options backdating," Research in Accounting Regulation, Elsevier, vol. 22(1), pages 52-57.
    • Handle: RePEc:eee:reacre:v:22:y:2010:i:1:p:52-57
    DOI: 10.1016/j.racreg.2009.11.004
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    References listed on IDEAS

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    Cited by:

    1. Cullinan, Charles P. & Du, Hui & Zheng, Xiaochuan, 2012. "Barriers to entry to the big firm audit market: Evidence from market reaction to switches to second Tier audit firms in the post-sox period," Research in Accounting Regulation, Elsevier, vol. 24(1), pages 6-14.
    2. Smith, Antoinette L. & Alfonso, Elio & Hogan, Robert, 2018. "The impact of an SEC investigation on conference call participation and analysts’ forecast quality," Research in Accounting Regulation, Elsevier, vol. 30(2), pages 148-158.
    3. Surendranath R. Jory & Thanh N. Ngo & Daphne Wang & Amrita Saha, 2015. "The market response to corporate scandals involving CEOs," Applied Economics, Taylor & Francis Journals, vol. 47(17), pages 1723-1738, April.
    4. Sebastian Utz, 2019. "Corporate scandals and the reliability of ESG assessments: evidence from an international sample," Review of Managerial Science, Springer, vol. 13(2), pages 483-511, April.
    5. Fogel, Kathy & El-Khatib, Rwan & Feng, Nancy Chun & Torres-Spelliscy, Ciara, 2015. "Compliance costs and disclosure requirement mandates: Some evidence," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 83-87.

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