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The statistics can be staggering: .9 billion in fines, more than 120 companies under investigation.

In the coming pages, the history, legal issues, and effects on shareholder value will be explored.

While executives should be rewarded for success, protecting the shareholders is their primary responsibility.

When illegal backdating practices lead to negative actions, the shareholders suffer in many ways.

And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced and relatively many firms become takeover targets.

We thank Thomas Lys (the Editor) and an anonymous referee for helping us improve the paper.

while completing my Masters of Science in Accounting & Taxation at the University of Hartford.

Given the recent resurgence of news relating to options backdating, I thought I’d reprint the paper for those who might be interested.

Background American stock options are a type of derivative contract that gives the holder the right to buy or company stock at a set price (strike price) during a specified period..Companies will lose top talent, individuals who are key to the company’s growth and success.Fines and penalties reduce net income, depressing earnings per share and limiting capital available for dividends.Introduction Stock option backdating is a popular issue in today’s business environment.With recent changes made to the accounting and reporting rules for stock options, a storied array of companies have announced illegal practices, investigations, executive resignations, and much more.

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