Underperformance of founder-led firms: An examination of compensation contracting theories during the executive stock options backdating scandal |
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| Institution: | 1. Mississippi State University, Richard C. Adkerson School of Accountancy, P.O. Box EF, Mississippi State, MS 39762, United States;2. Mississippi State University, Department of Finance and Economics, P.O. Box 9580, Mississippi State, MS 39762, United States;3. Gonzaga University, Accounting Department, 502 E. Boone Avenue, AD Box 9, Spokane, WA 99258, United States;1. California Institute of Technology, 1200 E California Blvd, MC 228-77, Pasadena, CA 91125;2. University of California San Diego, Rady School of Management, 9500 Gilman Dr, La Jolla, CA 92093;1. Sy Syms Professor of Finance, Sy Syms School of Business, Finance Department, Yeshiva University, New York, NY 10033, USA;2. Utrecht School of Economics, Utrecht University, Kriekenpitplein 21-22, 3584 EC, Utrecht, The Netherlands;3. Research Fellow, Knut Wicksell Center for Financial Studies, Lund University, Lund, Sweden |
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| Abstract: | Using the executive stock option (ESO) backdating scandal as a backdrop, this paper examines whether compensation committees can effectively set executive compensation contracts in the presence of a founding CEO. Analyzing a sample of firms accused of backdating ESO grant dates and a control sample of non-backdating firms, we find evidence suggesting that managerial power influences the decision to backdate. Specifically, our analysis indicates the presence of a founder CEO increases the likelihood that ESOs are backdated by 22%. We further find that founder-led firms strongly underperform a matched sample of non-backdating firms. This finding contrasts a number of studies that document superior operating and stock return performance for founder-led firms. |
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