Option backdating board interlocks


The authors do a nice job in the paper of isolating their unique contributions, so I need not repeat any of that here.Overall, this is a very careful piece of empirical research, and I have no intention of nit-picking the empirical analysis.Top management would like to pay themselves as much as possible, but are constrained by the need to ensure sufficient efficiency to avoid a replacement.Shareholders can remove a manager, but only at a cost, and will therefore only do so if the anticipated future value of the manager (given by anticipated future performance net future compensation) falls short of that of a replacement by this replacement cost.Until recently, this idea has continued to gain popularity.According to Executive Compensation Reports, a newsletter "...The conceptual premise of the paper is that the backdating of CEO stock option grants is a direct consequence of “weak ” corporate governance structures.The authors make directional predictions about the relation between firms ’ individual governance structures and the probability that stock option backdating occurs.



22, issue 11, 4821-4847 Abstract: 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.The authors then predict the probability of backdating to be an increasing function of the metric representing each individual governance structure.CGL adds to the stream of papers that empirically examine the backdating issue (e.g., Heron and Lie (2007), Bebchuk, Grinstein and Peyer (2007), and Bizjak et al., (2006)).In this setting, observable compensation (salary) and hidden compensation (perks, pet projects, pensions, etc.) serve different roles for management and have different costs, and both are used in equilibrium.