Professor Bebchuk Investigates Option Backdating
Post date: November 17, 2006

The HLS Program on Corporate Governance recently released a study by Professor Lucian Bebchuk and co-authors Yaniv Grinsten and Urs Peyer, which examined the use of stock option backdating.

The discovery of backdated grants, currently the subject of intensive SEC investigations, has led to the forced resignation of many corporate executives and directors.

The study investigates the causes and consequences of option backdating during 1996-2005, and focuses on "lucky" grants, which the study defines as grants awarded at the lowest price of the grant month.

In reviewing past grant awards, the report discusses separately grants awarded to directors and to Mr. Jobs, but it lumps grants to senior managers other than Jobs together with all other grants. The company is surprisingly silent on whether any of these senior managers received "improperly dated" grants.

It finds that:

  • About 12 percent of public firms provided their CEOs lucky grants as a result of backdating or other forms of manipulation.
  • Lucky grants were more likely when the company did not have a majority of independent directors on the board and/or the CEO had longer tenure.
  • Luck was persistent: a CEO's chance of getting a lucky grant increased when a preceding grant was lucky as well.
  • Firms providing CEOs with lucky grants didn't reduce their compensation from other sources; to the contrary, such firms provided higher compensation from other sources.
  • The average gain to CEOs from grants that were backdated to the lowest price of the month exceeded 20 percent of the grant's reported value.
  • Manipulated lucky grants have been widespread not only among new economy firms but also among old economy firms.

"Our results establish a link between option backdating and corporate governance," says Bebchuk. "They also identify pools of option grants in which the incidence of manipulation has been especially high."

Lucian Bebchuk's earlier work on executive pay includes his book, written with Jesse Fried, "Pay without Performance: The Unfulfilled Promise of Executive Compensation".

A copy of the study is available here, as well as Professor Bebchuk's website.












Last updated: January 07
Copyright © The President and Fellows of Harvard College.
Questions should be directed to The Program on Corporate Governance.
Back to the home page