The Implications Of Granting Backdated Options

Abstract

Option backdating has recently been receiving extensive attention.  The remarkable pattern of stock prices systematically declining before and increasing after the granting of options has been documented in research papers for approximately a decade but only recently have firms been facing charges of improper procedures associated with this pattern.  One associated issue remaining to be investigated is what the implications are for shareholders of affected firms.  This paper addresses that issue.  It finds that there are marked negative implications for stockholders.  On average, when investigations into backdating are announced firms lose approximately 11% of their market value.  This translates into an average decline of more than half a billion dollars in market capitalization in the month leading up to the formal announcement of an investigation.