A Backdating Mystery Explained?

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One of the reasons that the backdating of stock options strikes much of the public—or at least the part of the public that reads the business section of their newspaper—as a scandal is that it is hard to understand. The thought—and it's not entirely a bad instinct—is that if corporate executives are doing anything this complex it probably is underhanded, dishonest and self-serving.
One thing that's hard to understand about backdating is why companies compensated executive with backdated options rather than simply granting more options to enhance executive pay. Why resort to this complicated accounting fiction instead of just upping the actual grant? A recent study suggests an answer: because executives look at "in the money" options as a form of wealth worth considerably more than "at the money" options, even though it may be years before they can cash in the options.
Here's how Larry Ribstein explains the significance of the study:

So it seems there really were business reasons for the backdating that did not involve overpaying executives. Indeed, the study reported above suggests that companies can use in-the-money options to get away with paying executives less than if they used straight cash.

Backdating and the endowment effect [Ideoblog]

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