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).
Therefore, the alternative hypothesis we propose, which we broadly label Agency Hypothesis, is that a firm’s involvement in the backdating scandal has significant economic implications, despite its limited (direct) impact on cash flows.
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.
The settlements cost companies and their executives, auditors and advisers a combined .3 billion, Audit Analytics said.
Most of the cases were resolved without the companies admitting or denying wrongdoing.
, we analyze the excess returns that occurred in short windows surrounding ten distinct news events related to backdating of stock option grants.
Our analysis focuses on 129 firms identified by the Wall Street Journal as implicated in the backdating scandal as of December 31, 2006.
“The process and paperwork behind this has gotten much more rigorous,” Ms. Backdating litigation was often consolidated into class actions or brought by shareholders on behalf of the company.