Does backdating explain
It is remarkable, but not incredibly surprising, how little attention has been paid to these questions in favor of the Gretchen Morgenstern-style rants that Professor Ribstein enjoys dismantling weekly.
Geoff’s earlier post frames the backdating issue in terms of the important economic (and legal) questions involved.
Now, I don’t mean to suggest that it is not a problem if companies are not complying with SEC disclosure regulations.
If so, non-disclosure is clearly a legal problem, holding aside the debate over the costs and benefits of such regulations for a moment.
compensation committees just don’t “get” that options are valuable and so give them out like candy.
As far as economic explanations go for the trends in executive compensation generally, and the increasing prevalence of backdating specifically, I find naivety from the economic actors concerning option value to be a particular unsatisfying explanation for a trend this robust.
But it is not obvious that the American system of executive pay â€” taken as a whole â€” is excessive or broken.
Tyler Cowen discusses this paper in this NY Times column.For example, Geoff makes the following basic (and sadly overlooked) points: Assuming for the moment that backdating is as rampant as the Lie study, media reports, and sudden wellspring of law firm and litigation consultant “backdating” teams suggests, it might be prudent to ask: “why? ” The only answers to the “so what” question have been assertions about shareholder exploitation and comparisons to Enron.As to “why backdating,” there seems to be little interest in figuring out what economic and institutional conditions led to the widespread adoption of option backdating and whether the practice is an efficient element of a compensation contract or something more sinister.Rather, we get mostly claims that backdating is a function of widespread fraud or compensation committee naiveity.As I explain below the fold, I don’t think either of these theories get us very far in terms of explaining backdating.