Shareholders of stock in companies caught up in the backdating scandal have lost at least $100 billion, by one measure, since backdating was first covered in The Wall Street Journal, according to an academic study released Wednesday.
The study measured the performance of 110 stocks in a Journal database of companies with backdating problems. The study measured the stocks’ daily returns versus the returns that would have been expected based on the stocks’ historical correlation to the wider market.
Stocks in the Journal’s database of companies with backdating problems began losing value after a May 2005 academic study by Erik Lie at the University of Iowa first raised the issue. Wednesday’s study said the stocks, on average, declined more than 15 percent compared with their expected returns during the four weeks leading to the Journal’s first article about backdating, in March 2006.
Investors anticipated “with remarkable accuracy exactly which companies would later prove to have deep legal problems regarding options,” the study said.
Options give the recipient a right to buy a stock at a fixed “strike price,” generally set at the stock’s market price the day of the grant, and options holders benefit if the stock rises above the strike price. In the backdating scandal, executives and directors dated option grants on days when the stock was at a low, enhancing the potential benefit.
The study was conducted by Gennaro Bernile at the University of Miami; Gregg Jarrell, former chief economist of the Securities and Exchange Commission and now an economics professor at the University of Rochester; and Howard Mulcahey, vice president of Forensic Economics Inc., an economics and finance consulting practice in Rochester, N.Y.
A list of companies with backdating problems compiled by The Associated Press is longer than the database in the study. As of Dec. 19, the AP has found at least 195 companies that have disclosed federal or internal investigations into backdating.