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 ra-
tional. 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 entrench-
ment and underperformance. 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 mecha-
nism.
Keywords: Option Backdating, Option Repricing, Corporate Governance, Corporate
Finance