Social capital and managerial opportunism: Evidence from option backdating

Social capital potentially influences corporate outcomes by reducing the likelihood of managerial self-serving behavior. This expectation follows from the likelihood that the consequences of self-serving behavior are severe for firms in high-social-capital areas. Thus, we employ a sample of firms that backdated option grants to examine these propositions. Accordingly, we find a negative and significant relation between social capital and the probability and magnitude of backdating. Furthermore, we find a positive and significant relation between social capital and likelihood, as well as between the speed of the termination of senior executives and board members following option backdating. Notably, we find evidence for the notion that community norms can influence corporate behavior by creating an environment where self-serving or bad behavior has severe consequences.

Automated summary

Social capital potentially influences corporate outcomes by reducing the likelihood of managerial self-serving behavior. The study finds a negative correlation between social capital and the probability and magnitude of stock option backdating, and a positive correlation between social capital and the likelihood and speed of senior executives and board members' termination following option backdating. The findings also suggest that community norms can influence corporate behavior by creating an environment where self-serving or bad behavior has severe consequences.