Backdating of Employee Stock Options: Signaling Effects for Corporate Governance and Internal Control Deficiencies

Abstract

Backdating occurs when a company retroactively changes option grant dates to a date when its stock was trading at a relatively low price. Firm announcements of backdating have lead to adverse publicity from the media and negative pronouncements from academics regarding the economic effects and motivation of those involved. This research finds that backdating signals to the capital markets that these firms have ineffective governance systems and poor internal controls. Further, nearly half of the backdating investigations show none has occurred or it was unintentional. This indicates the media's negative attention and the impact on share prices was unwarranted in many cases.