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RFS Advance Access originally published online on February 6, 2009
Review of Financial Studies 2009 22(11):4821-4847; doi:10.1093/rfs/hhn120
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Option Backdating and Board Interlocks

John Bizjak
Portland State University

Michael Lemmon
University of Utah and Hong Kong University of Science and Technology

Ryan Whitby
Texas Tech University

Send correspondence to John Bizjak, College of Business, Portland State University, PO Box 751, Portland, OR 97207; telephone: (503) 725-3727; fax: 503-725-5850; E-mail: bizjak{at}pdx.edu.

JEL Classification: G30, G32, G38, J33


  Abstract

We examine the role of board connections in explaining how the controversial practice of backdating employee stock options spread to a large number of firms across a wide range of industries. The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample. Our analysis provides new insight into how boards function and the role that they play in providing managerial oversight and determining corporate strategy.

We would like to thank Urs Peyer, Scott Schaefer, Jorge Walter, and seminar participants at Texas Tech, the University of Utah, Chinese University, City University of Hong Kong, and the 2008 American Finance Association Meetings for valuable comments.


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