Backdate Update: Yes, Backdating Really Did Cause Significant Shareholder Damage

The stock options backdating scandal may seem like a long-forgotten, if sordid, chapter in executive pay, even if some prominent commentators argued the whole thing was silly and should just be ignored. Litigation efforts against the 150-some companies accused of backdating largely fizzled except for a few prominent criminal, class-action, and shareholder derivative cases, some of which are still in litigation. About 20 private litigation cases have settled or been decided.

But in a new paper, Gennaro Bernile and Gregg Jarrel ("The Impact of the Options Backdating Scandal on Shareholders," Gennaro Bernile, Gregg A. Jarrell, Journal of Accounting and Economics, 2009, vol. 47, issue 1-2, pages 2-26) find that backdating caused major economic losses for shareholders. Judgments in the settled cases, for instance, have averaged 1.5% of pre-scandal market capitalization in class action suits and .23% in shareholder derivative suits (a very difficult kind of suit to win).

Looking at the days around the announcement of the backdating problem at a company, stock prices dropped seven percent below the market-adjusted expected price, and stayed that way for several weeks afterwards. Looking over a one-year period after the Wall Street Journal story opened the backdating controversy, normalized returns for a portfolio of scandal-tainted companies dropped between 15% and 20%, depending on what comparison benchmarks are used.