Characteristics of real backdaters

Recent findings show that CEOs tend to backdate their stock option grants so that a past date on which the stock price was particularly low is picked to be the grant date. Using cases now settled concerning a group of firms that were caught backdating, this paper aims to examine further whether backdating firms have higher levels of operating efficiency and corporate governance, lower levels of bankruptcy risk, more ability to increase shareholder wealth, and lower levels of market price risk. This paper also compares the characteristics of backdating firms during the pre-Sarbanes-Oxley Act of 2002 (SOX) and post-SOX periods.

This sample of backdater firms comprises those caught backdating who have settled their cases, according to data provided by Risk Metrics Group, a non-profit organization that keeps track of most securities class actions. A matched sample of 28 non-backdating, comparison-group firms was constructed to perform univariate and multivariate comparisons.

This study found that backdating firms on average have a higher price risk than non-backdating firms, and that increasing the percentage of shares owned by the major shareholders reduces the possibility of management conducting backdating activities.

No previous studies have used a sample of real backdating culprits. Previous studies have usually used likely backdating traits to identify a group of suspected backdaters. In contrast, the current study, by using a group of firms whose deliberate backdating behavior had led to lawsuits that have been settled in court, investigated the characteristics of known backdaters.