The Cost of Backdating: $10 billion or $5 billion?

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How much has the backdating scandal cost corporate America? In terms of resignations and firings, the cost has been steep, according to a report from the financial advisory firm Glass-Lewis. “The firm has said at least 44 executives and directors at 24 companies have been fired or resigned to date,” according to the San Jose Mercury News.
But that’s just people. How about what really matters?
According to the Mercury News, Glass-Lewis is claiming the scandal has cost at least 152 companies nationwide about $10.3 billion. But is it really that high? We’re not sure.
Glass-Lewis gets $10.3 billion by adding a decline of $5.1 billion in the backdating companies' market value to $5.2 billion in additional pre-tax compensation costs to the companies. It’s always troubling to calculate initial declines in market value as a “cost” of a particular event because share prices might bounce back once investors have had more time to analyze things. For instance, once it becomes clear that executives or board members at a particular won’t be going to jail for backdating, share prices might recover. Backdating creates additional uncertainty and risk but these might be temporary effects that can be resolved by public disclosure and internal investigations.
What’s more, there’s something fishy about the similarity of those two numbers—$5.1 billion and $5.2 billion. It looks to us like investors may have accurately discounted market value for the actual pre-tax compensation costs. Which would mean that there’s some double counting in adding these number together. Shouldn’t it be five and thus five and not five plus five?
Which pretty much sums up our impression of the entire backdating "scandal"— it's only about half as bad as it seems.

Study finds options scandal has cost companies billions
[San Jose Mercury News]

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