In the paper, Executive Turnover Following Option Backdating Allegations, forthcoming in The Accounting Review, we investigate how the Board of Directors and the managerial labor market (two private-sector monitoring mechanisms) respond to an allegation of option backdating. Allegations have been directed at numerous well-known public companies, including Microsoft, Apple, Home Depot, Costco, and United Health. Backdating occurs when executives designate as the grant date a day earlier than the one on which the board actually made the decision to grant options. Managers typically select an earlier date when the market price was lower, so they receive options that are already “in-the-money” on the actual grant date.
Editor’s Note: The following post comes to us from Ed Swanson, Professor and Durst Chair at the Mays Business School at Texas A&M University; Jap Efendi of the Department of Accounting at The University of Texas at Arlington; Rebecca Files of the Naveen Jindal School of Management at The University of Texas at Dallas; and Bo Ouyang of Penn State Great Valley.