Backdating Executive Option Grants - Nanyang Technological ...

which is significant at the 1% level. This result indicates that when Backdate50 increases by onestandard deviation (26.11%), PPS will increase by $1.72 per $1,000 shareholder return relative tothe sample median of $6.5.The coefficients of other control variables are generally consistent with existing empiricalstudies. In particular, we find that PPS tends to be higher for firms of small size, good operatingperformance, and long-tenure CEO.A CEO with a high PPS typically has high stock ownership of his own firm, which mayimply managerial entrenchment. For this reason, the positive association between PPS andbackdating variables could also be explained by the fact that managers with strong entrenchmentwill backdate more. To examine this possibility, we further use OGS as an alternative measure ofexecutive incentive in Column (2) of Table 8. Recall that this measure reflects the incentiveprovided in the CEO’s new option grants. Therefore, OGS is not related with managerialentrenchment. While PPS reflects the incentive from the CEO’s existing portfolio, OGSmeasures the incentives from the CEO’s newly granted options.Notably, our PPS and OGS variables are constructed based on reported grant-date stockprices. They may underestimate the actual managerial incentive if options are backdated becausethe delta of options is increasing in grant-date prices. In cases where options are backdated,reported grant-date prices tend to be lower than the actual prices, and thus, the actual PPS andOGS will be even higher than the values we are using. In other words, the current PPS and OGSvariables may cause biases against finding a positive relation between backdating and incentive.If we had adjusted those two incentive variables from the backdating biases , we would obtain aneven stronger positive relation between incentive and backdating. 2828 In the model, we define executive incentive as sensitivity of the certainty-equivalent option value to stock price,which is different from our empirical measures, PPS or OGS. The reason for this difference is that it is impossible to31