Option backdating board interlocks
Later, many thought that the practice occurred predominately during the period before the passage of the Sarbanes-Oxley Act in 2001.Now, however, a new study by Professor John Bizjak of Portland State University and Michael Lemmon and Ryan Whitby of the University of Utah entitled “Option Backdating and Board Interlocks” suggests that as many as fifty percent of the companies that issued options during the 1990’s engaged in backdating.
It also significantly changes the stakes for corporate boards and officers.Contact us if you experience any difficulty logging in.We use a large database on ESO exercises to document characteristics of exercise behavior and calibrate a utility-based model for measuring how differences in exercise behavior are manifested in option values and incentives.We find that for collars and forwards insiders hedge a third of their ownership on average and tend to do so before declines in the firms stock price.Insiders tend to hedge less of their ownership with exchange funds and do not appear to use these prior to a decline in stock price.Specifically we examine how peer groups are selected and how they influence CEO pay.
One hypothesis is that A contrasting view is that peer groups are chosen to provide an accurate benchmark for determining the appropriate pay level that is necessary to both retain and motivate the CEO.
This conclusion would clearly make the practice much more wide-spread than anyone had initially thought.
The study also suggests that the practice may have proliferated as a result of directors who held positions on more than one board.
Overlapping board memberships may have facilitated the transmission of the practice from one company to another through the small and exclusive club of corporate directors.
This suggestion is also contrary to the current wisdom that the practice was management driven – at least that is the inference from the two cases the SEC and DOJ have filed.
This finding also undermines the theory that outside directors will serve as a watchdog on improper management practices.