Easy money? Managerial power and the option backdating game revisited

Abstract

Abstract This paper presents a model of a firm that backdates executive stock option grants in order to maximize actual compensation for a given level of reported compensation. The model is used to estimate the magnitude of the difference between the actual and reported values of option grants. Although the Sarbanes–Oxley Act has reduced the likelihood of very large differentials, it has had a relatively minor impact on the average differential. Misreporting has a greater magnitude, on average, when the share price is more volatile, the options vest earlier or have shorter lifetimes, or there is a longer window in which to grant the options. We analyze more than 36,000 option grants between 2003 and 2019 and find that when recipients have more to gain from strategic backdating, or when there is likely to be less monitoring from independent directors, firms are more likely to exhibit behavior consistent with strategic backdating.