Publication Type

Journal Article

Version

acceptedVersion

Publication Date

1-2021

Abstract

We hypothesize that one way accounting practices spread is through law firm connections. We investigate this prediction by examining companies that avoided reporting compensation expense by engaging in stock option backdating. We hypothesize that executives engaged in backdating because they were desensitized to its inappropriateness when they learned through their legal counsel that other companies were engaging in this practice. We identify backdating companies through backdating-related restatements of earnings. Using network analysis, we find that backdating companies are highly connected with other backdating companies via shared law firms. Logistic regressions reveal that the odds of a company backdating are 53 to 88 percent higher when its law firm has another client that backdates, and that law firm connections are incremental to board interlocks and geographic location. Finally, law firms with backdating clients have more other clients with ‘‘lucky’’ grants, suggesting that backdating spread to other companies, but only some restated.

Keywords

accounting practices, stock options, backdating, law firms, directors, geographic location, network analysis

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Accounting Review

Volume

96

Issue

1

First Page

431

Last Page

464

ISSN

0001-4826

Identifier

10.2308/tar-2017-0051

Publisher

American Accounting Association

Additional URL

https://doi.org/10.2308/tar-2017-0051

Download

Share

COinS