Executive turnover in the stock option backdating wave: The impact of social context

Abstract

While boards are known to react to corporate misconduct by removing the executives responsible, little is known about whether the board's response is shaped by the firm's social context. Using the 2006 stock option backdating scandal, in which firms manipulated stock option grant dates, we examine the impact of two dimensions of social context-the pervasiveness of the misconduct and the media attention to the misconduct. We find that firms implicated later in the backdating scandal are less likely to experience executive turnover than those implicated earlier. We also find that the amount of media attention to backdating at the time a firm is implicated in the scandal increases the likelihood that the firm experiences executive turnover. and the characteristics associated with misconduct need to be taken into account.

Changing Corporate Governance in Response to Negative Media Reports

“…Organizational responses to scandals often involve changes in corporate governance, such as replacement of CEOs or board members (Arthaud-Day et al, 2006;Marcel and Cowen, 2014). While empirical evidence about different types of organizational misconduct has been accumulated, and different types of organizational responses have been explored (Gomulya and Boeker, 2014;Greve, Palmer and Pozner, 2010;Wiersema and Zhang, 2013), each of these studies is usually focused on a particular type of misconduct and a particular type of response. While empirical evidence about different types of organizational misconduct has been accumulated, and different types of organizational responses have been explored (Gomulya and Boeker, 2014;Greve, Palmer and Pozner, 2010;Wiersema and Zhang, 2013), each of these studies is usually focused on a particular type of misconduct and a particular type of response.…”

Do Good Times Breed Cheats? Prosperous Times Have Immediate and Lasting Implications for CEO Misconduct

“…Moreover, reporting the date of a grant assignment to the Security and Exchange Commission (SEC) is often governed within the executive suite. Consequently, CEOs have more control over whether their stock options are backdated compared to other executives or directors (Wiersema and Zhang, 2013).…”

“…Backdating is typically illegal as well as highly unethical (Narayanan, Schipani, and Seyhun, 2007;Carow, Heron, Lie and Neal, 2009;Bebchuk, Grinstein, and Peyer, 2010;Wiersema and Zhang, 2013). 1 It requires lying about the date a grant was received and necessitates intentionally falsifying financial documents that are submitted to the SEC (e.g., Lie, 2005).…”

“…Following public exposure of backdating, many companies were forced to restate earnings reports and pay considerable fines. Many individual executives were forced to surrender ill-gotten gains, pay substantial civil penalties, and even relinquish their jobs (Wiersema and Zhang, 2013).…”

“…CEOs have considerable control over whether their stock options are backdated (Lie, 2005;Bebchuk, Grinstein, and Peyer, 2010;Wiersema and Zhang, 2013). Other commonly used metrics of corporate misconduct, such as earnings restatements or shareholder lawsuits, can result from fraud or negligence by other members of the organization (Srinivasan, 2005).…”