Corporate Governance and Backdating of Executive Stock Options

Abstract

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. 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. We also find interlocking boards among backdating firms are associated with a higher incidence of backdating. 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