Journal of Business Ethics

, Volume 140, Issue 1, pp 65–79 | Cite as

Firm Linkages to Scandals via Directors and Professional Service Firms: Insights from the Backdating Scandal



We examine market reactions to the stock options backdating scandal in a slightly unusual way, but focusing on firms who were not perceived to have had a backdating concern, but were instead linked to firms who did have a backdating concern. These linkages can be found via board interlocks and the roles those directors perform. In addition we examine the linkages which occur from shared professional services firms, such as auditors and outside legal counsel. That these potential conduits are available is not in question, but rather, do investors perceive the conduits are used to pass along information about backdating stock options? We then ask if affiliation with dominant audit and legal services firms ameliorates or exacerbates those investor market reactions. We find that firms linked to the scandalized firms also face negative reactions, which are worsened when they also are serviced by professional services firms who are themselves are also linked to the managerial practice.


Backdating Stock options Board of director interlocks Professional services firms 


  1. Ansari, S. M., Fiss, P. C., & Zajac, E. J. (2010). Made to fit: How practices vary as they diffuse. Academy of Management Review, 35, 67–92.CrossRefGoogle Scholar
  2. Arthur, M. M. (2003). Share price reactions to work-family initiatives: An institutional perspective. Academy of Management Journal, 46, 497–508.CrossRefGoogle Scholar
  3. Bizjak, J., Lemmon, M., & Whitby, R. (2009). Option backdating and board interlocks. Review of Financial Studies, 22(11), 4821–4847.CrossRefGoogle Scholar
  4. Boxenbaum, E., & Jonsson, S. (2008). Isomorphism, diffusion and decoupling. In R. Greenwood, R. Suddaby, C. Oliver, & K. Sahlin-Anderson (Eds.), Handbook of Organizational Institutionalism. New York: Sage.Google Scholar
  5. Boyd, B. K. (1994). Board control and CEO compensation. Strategic Management Journal, 15(5), 335–344.CrossRefGoogle Scholar
  6. Brown, S. J., & Warner, J. B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14, 3–31.CrossRefGoogle Scholar
  7. CalPERS. (2011). CalPERS Global principles of accountable corporate governance. California Public Employees Retirement System.Google Scholar
  8. Collins, R. (1979). The credential society: An historical sociology of education and stratification. New York: Academic Press.Google Scholar
  9. Collins, D. W., Gong, G., & Li, H. (2009). Corporate governance and backdating of executive stock options. Contemporary Accounting Research, 26(2), 403–445.CrossRefGoogle Scholar
  10. Cornelissen, J. P., Haslam, S. A., & Balmer, J. M. T. (2007). Social identity, organizational identity and corporate identity: Towards an integrated understanding of processes, patternings, and products. British Journal of Management, 18, S1–S16.CrossRefGoogle Scholar
  11. Cowan, A. R. (2010). Eventus software, version 8.0. Cowan Research LC, Ames, IA.Google Scholar
  12. Daily, C. M., & Dalton, D. R. (1995). CEO and director turnover in failing firms: An illusion of change? Strategic Management Journal, 16(5), 393–400.CrossRefGoogle Scholar
  13. Daily, C. M., Johnson, J. L., & Dalton, D. R. (1999). On the measurements of board composition: Poor consistency and a serious mismatch of theory and operationalization. Decision Sciences, 30, 83–106.CrossRefGoogle Scholar
  14. Davis, G. F. (1991). Agents without principles? The spread of the poison pill through the intercorporate network. Administrative Science Quarterly, 36, 583–613.CrossRefGoogle Scholar
  15. DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48, 147–160.CrossRefGoogle Scholar
  16. Efendi, J., Files, R., Ouyang, B., & Swanson, E. P. (2013). Executive turnover following option backdating allegations. The Accounting Review, 88(1), 75–105.CrossRefGoogle Scholar
  17. Ertimur, Y., Ferri, F., & Maber, D. A. (2012). Reputation penalties for poor monitoring of executive pay: Evidence from option backdating. Journal of Financial Economics, 104(1), 118–144.CrossRefGoogle Scholar
  18. Fiss, P. C., & Zajac, E. J. (2004). The diffusion of ideas over contested terrain: The (non)adoption of a shareholder value orientation among German firms. Administrative Science Quarterly, 49, 501–534.Google Scholar
  19. Forelle, C., Bandler, J., & Anders, G. (2006). The perfect payday (cover story). Wall Street Journal, A1–A5.Google Scholar
  20. Holman, W. J., Jr. (2010). The backdating embarrassment. The Wall Street Journal (November 17, 2010, p. A19): Dow Jones.Google Scholar
  21. Homburg, C., Vollmayr, J., & Hahn, A. (2014). Firm value creation through major channel expansions: evidence from an event study in the United States, Germany, and China. Journal of Marketing, 78(3), 38–61.CrossRefGoogle Scholar
  22. Janney, J. J., & Gove, S. (2011). Reputation and corporate social responsibility: Aberrations, trends, and hypocrisy: reactions to firm choices in the stock option backdating scandal. Journal of Management Studies, 48(2), 699–714.Google Scholar
  23. Kang, E. (2008). Director interlocks and spillover effects of reputational penalties from financial reporting fraud. Academy of Management Journal, 51(3), 537–564.CrossRefGoogle Scholar
  24. Lie, E. (2005). On the timing of CEO stock option awards. Management Science, 51, 802–812.CrossRefGoogle Scholar
  25. MacKinlay, C. A. (1997). Event Studies in Economics and Finance. Journal of Economic Literature, 35(1), 13–39.Google Scholar
  26. Malhoutra, T., & Morris, T. (2009). Heterogeneity in professional services work. Journal of Management Studies, 46(6), 895–922.CrossRefGoogle Scholar
  27. McWilliams, A., & Siegel, D. (1997). Event studies in management research: Theoretical and empirical issues. Academy of Management Journal, 40, 626–657.CrossRefGoogle Scholar
  28. Meyer, J. W., & Rowan, B. (1977). Institutional organizations: Formal structures as myth and ceremony. American Journal of Sociology, 83, 340–363.CrossRefGoogle Scholar
  29. Neter, J., Wasserman, W., & Kutner, M. G. (1989). Applied linear regression analysis. Homewood, IL: Irwin.Google Scholar
  30. Pfeffer, J. (1972). Size and composition of corporate boards of directors: The organization and its environment. Administrative Science Quarterly, 17, 218–228.Google Scholar
  31. Pool, V., Wang, C., & Xie, F. (2009). Director reputation and board oversight: Evidence from firms interlocked with backdating investigation targets. Unpublished manuscript, Indiana University.Google Scholar
  32. Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA.: Sage.Google Scholar
  33. Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44, 315–349.CrossRefGoogle Scholar
  34. The Corporate Library. (2006). The spread of backdating: A closer look at the boards and directors involved. New York: The Corporate Library.Google Scholar
  35. Tolbert, P. S., & Zucker, L. G. (1983). Institutional sources of change in the formal structure of organizations: The diffusion of civil service reform, 1880–1935. Administrative Science Quarterly, 28(1), 22–39.CrossRefGoogle Scholar
  36. von Nordenflycht, A. (2010). What is a professional services firm? Toward a theory and taxonomy of knowledge-intensive firms. Academy of Management Review, 35(1), 155–174.CrossRefGoogle Scholar
  37. von Nordenflycht, A. (2011). Firm size and industry structure under human capital intensity: Insights from the evolution of the global advertising industry. Organization Science, 22(1), 141–157.CrossRefGoogle Scholar
  38. Wagner, J. A, I. I. I., Stimpert, J. L., & Fubara, E. I. (1998). Board composition and organizational performance: Two studies of insider/outside effects. Journal of Management Studies, 35(5), 655–677.CrossRefGoogle Scholar
  39. Wall Street Journal. (2008). Timing is everything. The Wall Street Journal, On-line edition. 7 September, 2008. Last accessed 16 June, 2013.Google Scholar
  40. Whetten, D. A., & Mackey, A. (2002). A social actor conception of organizational identity and its implications for the study of organizational reputation. Business and Society, 41, 393–414.CrossRefGoogle Scholar
  41. Young, B. (2006). Stock option backdating—What investors need to know, 11 Alert: Council Research Service, 24.

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.Kern Faculty Fellow of Engineering and EntrepreneurshipUniversity of DaytonDaytonUSA
  2. 2.University of VermontBurlingtonUSA

Personalised recommendations