Backdating of stock option grants
in order to make them more valuable, it seemed like a problem that would come and go quickly... What’s distinctive about this one is that the benefits companies got from backdating were so small.
In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.
You see, if you backdate stock options to a date when the price of the stock was lower, then the options are "in-the-money" when granted.
That means the company incurs an expense equal to the difference in the share price between the two dates.
However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.
If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.