Reference no: EM132754804

Imagine you are an Emeritus Professor at Monash University. You become a director of Tempest Security, a publicly listed company. The managers of Tempest Security have been receiving a fixed amount of salary based on their ranks for years. So you propose granting stock options to the managers. After reviewing your proposal, the managers ask to be given the choice of backdating.

Problem (a) Explain why you propose granting stock options to the managers of Tempest Security.

Problem (b) Explain what backdating is and why the managers ask for backdating.

Problem (c) You find an academic study based on a sample of S&P 500 companies. For each company throughout the sample years, the study constructs board independence (i.e., the proportion of independent directors) and firm value. The findings in the study show that, for any given year, firms with more board independence always have higher firm value. Explain whether this result means independent directors cause an increase in firm value.