Instead, I offer a critique of the paper that is pertinent to the entire literature on backdating and to empirical corporate governance research in general.In particular, I consider fundamental problems in interpreting statistical associations between corporate behavior and measures of individual corporate governance structures.John Bizjak, Michael Lemmon and Ryan Whitby Review of Financial Studies, 2009, vol.
We then test these implications and find results that generally support the predictions of our model. Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affect others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no l ..." Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affect others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the influence of an investor on others.
In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others.
A large body of corporate governance research, including CGL, regress measures of corporate behavior on metrics of corporate governance attributes. This paper investigates how directors’incentives play a role in the occurrences of firms’backdating employee stock options.
Particularly, we examine directors’option compensation, independence of the audit and compensation committees, board size and board independence.
In this setting, observable compensation (salary) and hidden compensation (perks, pet projects, pensions, etc.) serve different roles for management and have different costs, and both are used in equilibrium.
We examine the relationship between observable and hidden compensation and other variable in a dynamic model, and derive a number of unique predictions regarding these two types of pay.
We review here evidence concerning how these activities cause beliefs and behaviors to spread, affect financial decisions, and affect market prices; and theoretical models of social influence and its effects on capital markets.
Social influence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets. In this discussion, I provide some big picture thoughts on the Collins, Gong and Li (2009) paper (CGL hereafter) entitled: Corporate Governance and Backdating of Executive Stock Options.
Top management would like to pay themselves as much as possible, but are constrained by the need to ensure sufficient efficiency to avoid a replacement.
Shareholders can remove a manager, but only at a cost, and will therefore only do so if the anticipated future value of the manager (given by anticipated future performance net future compensation) falls short of that of a replacement by this replacement cost.
In some sense, CGL is the culmination of this research line.