To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jacceco.2008.11.004 Byline: Gennaro Bernile (a), Gregg A. Jarrell (b) Keywords: Agency costs; Event-study; Option backdating; Corporate scandal Abstract: The revelation that scores of firms engaged in the illegal manipulation of stock options' grant dates (i.e. 'backdating') captured much public attention. The evidence indicates that the consequences stemming from management misconduct and misrepresentation are of first-order importance in this context as shareholders of firms accused of backdating experience large negative, statistically significant abnormal returns. Furthermore, shareholders' losses are directly related to firms' likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications. And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced and relatively many firms become takeover targets. Author Affiliation: (a) University of Miami, School of Business Administration, USA (b) William E. Simon Graduate School of Business Administration, University of Rochester, USA Article History: Received 14 March 2007; Revised 6 October 2008; Accepted 6 November 2008 Article Note: (footnote) [star] We thank Thomas Lys (the Editor) and an anonymous referee for helping us improve the paper. We are also grateful to Sandro Andrade, Jennifer Carpenter, Jay Emerson, Doug Emery, Yaniv Grinstein, Shane Heitzman, Xi Li, Evgeny Lyandes, Howard Mulcahey, Robert Neal, Katherine Schipper, Douglas Skinner, Jerry Zimmermann, seminar participants at the University of Miami and the Securities & Exchange Commission (SEC), and participants of the 2007 Journal of Accounting & Economics Conference and the Western Finance Association 2008 Meetings for their comments and suggestions; and to Hernan Awad for his invaluable help in designing the Monte-Carlo simulations used to compute the grant dates' odds. Finally, we gratefully acknowledge the special efforts and contributions in support of this study by Michael Schwert, Duke University, and Erin Redoutey and Raul Izquierdo, Univeristy of Miami. All remaining errors are our own.