BACKDATING AND DIRECTOR INCENTIVES: MONEY OR REPUTATION?

Authors


  • We thank Kai Li (the referee), Jayant Kale (the editor), R. David Mclean, Roy Wiggins III, workshop participants at Bentley University, and seminar participants at the 2008 European Financial Management Association conference and the 2008 Financial Management Association Conference for their insightful comments. We would also like to thank the Center for Business Ethics at Bentley University for their financial support. Both authors acknowledge support from Bentley University summer research grant. We are grateful for Jiawei Zhang's excellent research assistance.

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.

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