We conclude that while executive compensation schemes (e.Introduction Stock options are intended to align the interests of managers with those of shareholders.

corporate governance and backdating of executive stock options-47corporate governance and backdating of executive stock options-21

We do not find, however, that compensation (or audit) committees play a significant role in preventing option backdating.

Our results show that the probability of backdating increases for firms having CEOs who are young, are founders, have long tenure, and own smaller amounts of company stock.

Specifically, we identify backdating firms which are under investigation by the Securities and Exchange Commission and/or the Department of Justice and examine whether there are differences in the corporate governance mechanisms of the backdating firms and a group of control firms.

Measuring the effectiveness of a firm's governance system is a difficult task.

Our measures attempt to capture multiple dimensions of a corporate governance system including the effectiveness of a company's board of directors and its compensation committee, the quality of a firm's internal and external governance mechanisms, and the influence and power of the CEO.

Our study differs in several ways from prior studies.

Unlike prior studies that use corporate governance data from Investor Responsibility Research Center's (IRRC) databases (e.g., Collins et al., 2009), we hand collect data from proxy statements for our main tests.

This enables us to include small backdating firms that are not covered by IRRC and also include variables not covered by IRRC, such as the number of board meetings and the presence of a CEO-founder.

To examine these issues, we first discuss the role values and norms can play with respect to underlying corporate governance and the proper role of directors, such as transparency, accountability, integrity (which is reflected in proper mechanisms of checks and balances), and public responsibility.