The economic consequences of ceasing option backdating

Szu-fan Chen ()
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Szu-fan Chen: The Hong Kong University of Science and Technology

Review of Accounting Studies, 2023, vol. 28, issue 4, No 6, 2039-2074

Abstract: Abstract The 2002 enactment of Section 403(a) of the Sarbanes-Oxley Act (SOX403) made option backdating less viable for firms. I examine whether the loss of the benefits obtained from option backdating is associated with more fraud after the enactment of SOX403. For firms suspected of backdating options (suspect firms), I find an increase in fraudulent financial reporting after the enactment of SOX403. The increase in fraud is more prominent for suspect firms more affected by SOX403. I also find an increase in insider trading profits from fraud for individuals who formerly benefited from option backdating. My study highlights an unintended consequence of SOX403. The opportunistic timing of executive option compensation appears to be replaced with fraudulent activities that are likely more value-destroying.

Keywords: Securities regulation; Financial reporting fraud; Option backdating; Insider trading (search for similar items in EconPapers)
JEL-codes: G18 G34 K22 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11142-022-09681-5

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