Spread of options backdating

Finally, we find that commonalities in firms’ auditors and geographic location also help to explain the initiation of backdating.The fact that commonality in auditor choice and geographic location is associated with the initiation of backdating suggests that other linkages between firms beyond those created through board interlocks may also play a role in facilitating the spread of this practice.

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A new study cites as one of the causal factors, a high level of inbreeding among corporate boards.

In other words, of the companies that have been implicated in the scandal, many of them have shared board members with each other, suggesting that the idea to backdate options as a compensation mechanism may have spread via word of mouth from company to company.

Our results are both statistically and economically significant.

The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample.

The answer is not to change the directors' titles, it's to change the directors.

, we examine the role of board connections in explaining how the controversial practice of backdating employee stock options spread to a large number of firms across a wide range of industries.And as the research report states, "Director interlocking relationships are fast becoming what appear to be the most important characteristic and indicator of backdating problems." In other words, we can think of backdating as a communicable disease.Which prompts an irresistible question: By analyzing the director network, can we tell where the problem started? Not exactly, but researchers can diagram the network and identify the most central boards. Hill tells me flatly, "We do not backdate stock options." The Corporate Library says it included the company because two shareholder lawsuits allege backdating, and if the suits are dismissed, Novellus will be removed from the research.The report says they are the boards of infotech manufacturer Sanmina-SCI (Charts), chipmaking-equipment supplier Novellus Systems (Charts) and Internet-equipment supplier Juniper Networks (Charts). Hill calls the study "amateur statistical epidemiology." A Juniper spokeswoman says only that the company disagrees with the study's methodology and conclusions. In any case, isn't this purely guilt by association?Is there a shred of evidence that any specific individuals spread backdating?We are also grateful to Sandro Andrade, Jennifer Carpenter, Jay Emerson, Doug Emery, Yaniv Grinstein, Shane Heitzman, Xi Li, Evgeny Lyandes, Howard Mulcahey, Robert Neal, Katherine Schipper, Douglas Skinner, Jerry Zimmermann, seminar participants at the University of Miami and the Securities & Exchange Commission (SEC), and participants of the 2007 Journal of Accounting & Economics Conference and the Western Finance Association 2008 Meetings for their comments and suggestions; and to Hernan Awad for his invaluable help in designing the Monte-Carlo simulations used to compute the grant dates’ odds.

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