Impact of backdating

We also find that institutional investors reduce their holdings in firms accused of backdating, possibly due to higher monitoring costs, and that firms involved in the scandal are very likely (10% of the sample) to receive arguably fair takeover offers.

Overall, the evidence is consistent with the hypothesis that the loss of investors’ confidence in the firm’s management is a first-order determinant of the economic consequences resulting from the option backdating scandal.

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Furthermore, shareholders’ losses are directly related to firms’ likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications.Managing the execution of complex technology programs is all in a days work., we analyze the excess returns that occurred in short windows surrounding ten distinct news events related to backdating of stock option grants.In addition, consistent with this interpretation, the occurrence of government investigations or delisting notices have no incremental explanatory power, after controlling for firms’ likely culpability.We find that the losses are attenuated when tainted management of less successful firms is more likely to be replaced.

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