Impact of backdating

For the first news event (typically the announcement of an internal investigation by the firm), we find a statistically significant excess return of about -4.50% in the -20 to -2 window and -2.40% in the -1 to 1 window.

The magnitude of the implied wealth changes seems too large to be attributed to any reasonable estimate of direct out-of-pocket costs of the backdating scandal or to the resulting legal penalties disclosed to date (direct cost hypothesis).

Our analysis focuses on 129 firms identified by the Wall Street Journal as implicated in the backdating scandal as of December 31, 2006.

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Our hope is that this will further increase the reach and impact of the article. While one of us has run a blog on academic research in the past, unlinked to any journal, we give a hat-tip to the for showing how this can be successfully used for a journal.

The lead article in the January 2017 issue of the Review of Finance is “Corporate Governance and Blockchains” by David Yermack of NYU Stern.

He consistently rose to the top ranks of the organizations he leads, always putting his team first.

Fred enjoys being a sounding board & trusted advisor for many Chief's across the southeast.

This post launches the Managing Editors’ blog, where we summarize the lead article of each issue in a non-technical manner.

The intended audience for this blog is not just non-academics, but also academics outside the particular literature to which the paper contributes.

We are also grateful to Sandro Andrade, Jennifer Carpenter, Jay Emerson, Doug Emery, Yaniv Grinstein, Shane Heitzman, Xi Li, Evgeny Lyandes, Howard Mulcahey, Robert Neal, Katherine Schipper, Douglas Skinner, Jerry Zimmermann, seminar participants at the University of Miami and the Securities & Exchange Commission (SEC), and participants of the 2007 Journal of Accounting & Economics Conference and the Western Finance Association 2008 Meetings for their comments and suggestions; and to Hernan Awad for his invaluable help in designing the Monte-Carlo simulations used to compute the grant dates’ odds.

Finally, we gratefully acknowledge the special efforts and contributions in support of this study by Michael Schwert, Duke University, and Erin Redoutey and Raul Izquierdo, Univeristy of Miami.

A series of multivariate show that measures we expect to be related to the effect of the scandal on the value of firms’ reputational capital and information risk are significantly related to changes in shareholders’ wealth.

Conversely, variables one would expect to be related to the magnitude of direct out-of-pocket expenses, namely the number of past grants and/or their value, are not significantly related or are positively related to shareholders’ wealth effects, inconsistent with the direct cost hypothesis.

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