The Impact of Regulatory Intervention in Stock Options Backdating Disclosures

Abstract

Previous literature on the effects of disclosing options backdating problems focused mainly on estimating the cumulative and aggregate losses. This paper takes a different approach and investigates the effect of regulatory intervention on companies accused of backdating stock options. An event study approach is employed to analyze the announcements of backdating problems made by 83 companies. Our analysis shows that the companies under regulatory investigation suffered greater declines in value than companies who are not. However, the magnitude of the decline in value associated with outside investigation does not appear to be dependent on the timing of the regulatory intervention. In other words, no extra loss was incurred to those companies whose backdating problems were first exposed or triggered by regulatory action. Further analysis indicates that total loss in market value suffered by companies may reflect both the severity of the backdating problems and an extra cost imposed by regulatory investigations per se. Our preliminary estimate is that as much as one-third of the total loss may be attributable to regulatory involvement.