Is backdating vicious? - An investigation on the rationale of backdating CEO stock options

The widespread practice of backdating executive stock options has drawn strong criticism of the public and also serious attention of the regulators. Other than pure luck and insider manipulation, I conjecture some backdating is rational. By using a sample of 126 US companies under investigations related to backdating, I find them larger, younger, having lower cash holding and higher stock volatility. In addition, there is little evidence for managerial entrenchment and under performance. Lastly, I build up a simple dynamic game of imperfect information, showing that higher performance indeed increases the backdating propensity, which distinguishes backdating from repricing mechanism.