Three Michigan B school profs have a new paper up on SSRN entitled â€œThe Economic Impact of Backdating Executive Stock Options.â€? The paper adds some important data to the backdating debate. Specifically, the paper looked at 45 firms implicated in the backdating scandal and found that over a 21-day period surrounding the revelation of backdating, the average cumulative abnormal return of the stock of these firms was approximately negative 8%. It also found that the average market capitalization loss per firm during the period was $510 million. In light of these findings, I think it is now untenable to argue that backdating has caused little or no harm to investors. Yes, the monetary effects of backdating were timely disclosed and promptly incorporated into share price. However, as I noted in a comment to this post and as alluded to in the paper, the drop in price likely reflects reduced investor confidence in the firmsâ€™ management and internal controls exacerbated by the media frenzy and anticipated diversion of firm resources to deal with internal and external investigations, damage control, etc.
Backdating did harm investors.
Trackbacks and Pingbacks:
September 24, 2006
[...] Bill Sjostrom at Truth on the Market points to a paper that shows the effect of the options backdating scandal on company stock prices. [...]
September 23, 2006
The harm from backdating?…
I said yesterday that the key question about backdating is what happened to the affected firms’ shares when the backdating was disclosed or otherwise became known. I cited some anecdotal evidence that there was no such harm. Bill Sjostrom links…